Sometimes owner / managers of small limited companies ‘forget’ that the money in the company bank account does in fact belong to the company and not to them. The company must always be able to pay its way including suppliers and its corporation tax bill before things like dividends are declared. This can sometimes result in quite a detailed calculation each time the dividend is taken.
The lines can become blurred when owner / managers start to ‘use the funds as their own’ for things like the weekly shop, Christmas, and take ‘cash drawings’ when they need it as opposed to when the company can afford it. If this is the case and there simply aren’t enough funds for the company to pay its way, then a ‘loan account’ is created. This needs to be paid back (and not drawn back down!) within 9 months of the company’s year end to avoid a whacking 32.5% tax charge on the balance.
For example, you take £5,000 too much from the company and you can’t pay it back – the Company’s Corporation Tax bill is increased by £1,625. In the event this is repaid to the company at some point then it is refundable but its likely HMRC will want to see evidence of physical repayment like a bank statement.
HMRC have revamped their web pages and the link is attached (unfortunately it still makes reference to the old rate of tax of 25%) For more information follow THIS LINK
For more information or for help with Directors Loan Account issues, please feel free to contact me for more information and assistance.