How a Directors’ Loan Account works and where tax comes in

The term Director’s Loan Account is the name used to cover money a director of a limited company takes out of the business for any other reason than as a salary, dividend or repayment of money they have put in.

The term reflects the fact that if you do this, you are borrowing money from the business and you owe it back. It’s perfectly legal, provided the business isn’t in financial difficulty and that the company articles allow for it. It is, however, very important to understand exactly how the account works in order to avoid confusing personal and business cash or becoming tangled up in tax complications.

Working with a Director’s Loan Account

Typically, a director will have what is known as a ‘current account’ with the company. This will be credited whenever the business owes the director for something such as expenses incurred on company business. When a director wants to take a loan from the business, a directors’ loan account should also be set up. This can be kept separate from the current account for bookkeeping purposes, or the two can be merged into a single account that includes all director/business transactions. The benefit of choosing the single account option is that you get a single figure showing at a glance how much of your money is tied up in the business or how much you owe to the business.

If the account is in credit, then that figure shows an amount of money you are effectively lending the company, reflecting the fact you have put more money into the business than you have taken out. This money is yours, and you can take it out as and when you wish. There are no tax implications. If you decide to charge the business interest on the money, however, you do of course have to declare this for income tax purposes.

If the account is in debit, then the account is overdrawn and you owe the business money: you have taken out more money than you have put in. This does bring tax implications, which I’ll come to shortly.

Even if no account is set up in your company’s books, HMRC will still consider any money you draw out as a director’s loan. If they undertake an enquiry, they will expect to see a full transaction history of director’s loan arrangements.

If your business has more than one director, you must keep records of each loan account separately, and any personal spending using company money must be recorded in the appropriate account.

Shareholder/Board approval

Loans of more than £10,000 are subject to shareholder approval. This is usually provided via an Ordinary Resolution and should be documented. The terms of the loan should be agreed by the Board and should also be documented.

How to repay the loan

You can repay the loan by:

  • Putting money directly into the business bank account.
  • Offsetting the amount borrowed by raising a non-payable dividend.
  • Offsetting the amount borrowed by crediting the account with sums spent using your personal cash on behalf of the business – e.g. reclaiming expenses.

Tax implications of a Directors Loan

  1. Corporation tax

HMRC can levy a tax charge called S455 if there is still a balance outstanding in the director’s loan account by the date of the company’s financial year-end and where the company is a close company – typically a business with less than five shareholders or directors. The sum owing is 25% of the balance due at the period end, and it is payable at the latest nine months and a day from that point. The idea is to deter companies from providing directors with what is effectively a generous perk – an interest free loan.

The good news is that as soon as the director does pay back the loan, the business can reclaim the tax paid. If the director pays up before the nine months and a day deadline, then the tax never needs paying in the first place.

  1. Benefits in kind

If the loan is greater than £10,000 and no interest is being charged, HMRC expects to see an amount equal to the cost of the interest reported on form P11D as a benefit in kind. The business also has to pay Class 1A NICs on the amount, and the director has to pay income tax on it. It can work out cheaper and easier to charge the director interest in the first place.

If you do want to take cash out of the business for personal use, therefore, be aware that the tax situation may not be straightforward and that you need to make sure your reporting is compliant. It’s important to make arrangements as early as possible, particularly in light of today’s RTI reporting requirements.

If your accountant hasn’t talked to you about how to make best use of your Director’s Loan Account, we’d be happy to help. Just email me here or give us a call on 01625 869712

 

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How to Choose an Accountant

Does it matter who your accountant is? Yes. Because every business is different, and every accountant is different. Make the right choice, and you’ll save time and money as well as gaining peace of mind that the business is properly set up and administered.

If you’re about to look for a new accountant, here’s our guide as to what you should consider:

1. Competency

Unlike with solicitors and doctors, there is no restriction on the use of the term ‘accountant’.  It’s possible for anyone to practice without any particular qualification.
Make sure therefore that you choose an accountant who is a member of one of the main accountancy bodies such as ACCA (the Association of Chartered Certified Accountants), ICAEW (the Association of Chartered Accountants in England and Wales) or ICAS (the Institute of Chartered Accountants of Scotland). This way, you know the person concerned has the appropriate training. In addition, the professional bodies hold their members to account, so you have protection should anything go wrong.

2. Personality

It’s important you click with your accountant. You’ll be putting a lot of trust in them and need to feel that you can be open and honest with them and be confident that they will act the same way with you.

3. Proactivity

Some accountants make no claim to be proactive.They see their role as simply doing the books at the end of the year and working out what tax you owe.

But why pay purely for someone to report on what you’ve already done?

It makes much more business sense to find an accountant who will also look ahead and help make the next year better. You can get a good idea of how proactive someone is likely to be when you first meet them: Do they ask questions, and seem interested in your business? Are they looking for ways to help and making suggestions right from the start?

4. Online accounting software

An increasingly successful model is for accountants to provide online accounting software as part of their service.This can be a huge time and money saver, so it’s well worth finding out what’s on offer.  Some accountants are tied to one particular product, others are happy to advise on what will work best for you.

With the right software package in place, it’s then quick and easy to keep on top of both invoicing and bookkeeping. You can run management reports at the click of a mouse, and, with all the information in the cloud, your accountant can access the data, make adjustments, and give up-to-the minute advice at any time.

5. Pricing model

Some accountants charge by the hour, others offer fixed pricing. With the hourly rate option, there’s no limit on what you might find yourself paying. With fixed pricing you can budget knowing exactly what your bills will be. A good accountant will be transparent about their pricing, making it easy for you to see what’s included and make sure the package offered covers the services you need.

It’s important also to check you can call or email the accountant for advice whenever you need without extra charge – you don’t want to be worrying about costs each time you have a query.

6. Experience and expertise

Does the firm have the relevant experience to handle your accounting both now and into the future, as your business grows? Do they have the tax expertise to keep your tax bills down as your affairs become more complex?

Whilst you can of course change accountants at any time, there’s a lot of to be said for building a relationship with someone who can take you from where you are now to where you want to be.

7. Accessibility

How easy will it be to get hold of your accountant should you want to talk? You want to be able to speak to the person with the relevant knowledge and experience, not find yourself always being put through to a junior.

8. Support

You never know when you will need your accountant urgently – and HMRC deadlines aren’t flexible. It’s important therefore to be sure there is back-up for holidays and sickness.

The best way to find out how a prospective accountant matches up is, of course, to have a face-to-face meeting. Ask good questions, see whether you feel comfortable with the individual concerned, and you’re well on the way to finding someone who will become a valued part of your team and work closely with you to help make your business prosper.

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Xero transfer

We have been busy transferring clients to cloud based accounting program Xero from other desktop based software systems recently,  (the company year end of 31st March is very popular!), we can do this quickly and easily, and most importantly without disruption to clients.

The benefits of using a cloud accounting package are numerous e.g.

  • automatic bank feeds
  • debtor positions
  • company dashboard
  • monthly profit and loss in various reporting choices
  • Use an app to capture expense invoices
  • email invoices and statements to customers

All these features mean increased financial control, credit control and no missed expenses.

It also helps us to help our clients, if they have a query, we can login to the same data at the same time, solving the problem quickly.

Combine this with our accounting package that means that call comes at no extra charge too!

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Xero invoicing

We have have worked in association with one of our partners to create some pretty amazing word templates for users in the UK and Australia recently.
This gives Xero users more flexibility in choosing the layout, content and appearance of that all important financial communication with customers.
This is particularly desirable for creative companies to send visually appealing invoices to their customers.

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Part Time Accounts Assistant Required

We are looking to recruit a part time accounts assistant to work 3 days a week around school time or 2 days a week 9 to 5.30 at our offices in Macclesfield. Salary offered is Pro Rata and negotiable dependent upon experience.Practice experience is essential and candidates must have extensive knowledge of Sage, Iris, VAT, PAYE, Self Assessment Returns, preparing accounts and advanced Excel skills. Also, experience in tax matters, ie Corporation Tax, Personal Tax and dealing with HMRC is essential.Experience preferred in Xero or Freeagent, but training will be provided.You must be willing to take part in training, attend marketing events and mentoring other employees.The position offers flexible working hours.Please apply enclosing a cv to info@financialgrowthsolutions.co.uk
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Xero Comments on Share Price

The logo for Xero accounting software

MARKET RELEASE

Xero comments on share price

18 March 2013

In respect to the company’s recent share price increases, Xero Ltd (XRO) is aware of increased interest from overseas investors wanting exposure to the Software as a Service technology segment. Software as a Service isseen as a high growth opportunity with industry revenues expected to grow significantly over the next five years.The company is experiencing increased profile internationally following the appointment of an ex-Google executive, US media interest and recent roadshows in Australia attended by over 3700 accountants. In New Zealand the annual Xerocon conference in February had 800 attendees, up from 400 last year.The company is not seeking additional funds at this time.

It has over NZ$80 million in cash and is sufficiently funded to execute on its current plans.

Xero advises it remains on track to double revenue for the full year to 31 March 2013, has continued to invest for growth and will finish the financial year with over 400 staff. The company remains focused on extending its feature set and building up infrastructure and services to provide the capability to support a million customers.In 2013 Xero expects to complete the breadth of functionality to fully compete with the incumbent desktop software providers while delivering significant new innovations. A key focus for the business for the year ahead is building out the global in-market teams.

Xero CEO Rod Drury says speculation about Xero listing on a US stock exchange is a little early.“A US listing is certainly something a business with global aspirations would consider. We have been advised it would not make sense to consider a listing in the US until we can see at least US$100 million of revenue, so the focus for now remains on growing the team, customers and revenue while building systems and processes for efficiency.”

The company will provide an FY13 operating update in early April.

For more information contact:

Rod Drury

Xero Chief Executive

rod.drury@xero.com

+64 27 6000 007

About Xero

Xero provides beautiful, easy to use online accounting software for small businesses and their advisors. The company has over 135,000 paying customers and 200,000 users in more than 100 countries around the world.

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How will a Finance Director save me money?

How will a Finance Director save me money?

Using a finance director, as opposed to employing a full time accountant, may be an ideal way for you to save money in your business. Finance directors can be employed on a interim or part time basis and offer business and strategic advice.    They can also help you prepare a business for sale or advise on succession planning.

A company may have been in existence for a number of years and have, say, a bookkeeper and a tax accountant, but they may not have considered the value of having a specialist to analyse such areas as business systems, pricing, contracts, business plans, risk analysis. These are all successful areas of expertise for Financial Growth Solutions.

Some companies may have unnecessarily complex systems, we look at streamlining their structure and focus on saving money. So, for example, if we save a client an amount of money in year, that saving will, more often than not, apply over many years to come, so accumulating the savings.

One Manchester based client had a chartered accountant preparing their accounts, paid a substantial amount in tax, but they had never evaluated their systems or evaluated the capabilities of their accounts support staff. When Financial Growth Solutions  took over, the result was an overall saving of £80k in costs in the first year, and every year thereafter, the accountant left and was replaced by the team that were effectively being held back.

The advantages of finance director outsourcing are clear: advice as and when you need it, you only pay for what you need, accounting expertise, without high fees or employment contracts, for example the cost per day is approximately half that of the typical charges levied by a partner in general practice. It will also deliver time savings for your business, give you new perspectives on your business as well as acting as a sounding board for your management team.

Image source

The benefits of outsourcing

There are many reasons to outsource your finance director function and here are some very good ones

 

 

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Legacy of the Olympics: cycling to work

Whether or not the Olympics or the sunshine has spurred you on to start thinking about sports and exercise, it’s a timely reminder that there are some provisions in the taxes acts that encourage cycling to work.

As an employer you may either run a cycle to work scheme or through a third-party provider, like a bike shop. Through the scheme, you can give access to a loaned bike and/or safety equipment.

Employees must use the bike and/or safety equipment mainly (more than 50 per cent of the time) for ‘qualifying’ journeys. This means a journey or part of a journey:

  • between an employee’s home and workplace
  • between one workplace and another
  • to and from the train station to get to work

Taking part in the scheme means that employees don’t have to pay a lump sum up front to buy a bike and/or safety equipment. Instead, you could loan the bike and/or equipment, usually up to the value of £1,000.

 

Bearing in mind that normal commuting between a permanent workplace and work is disallowed, it’s a great way to get fitter and save money!

 

Please contact us if you would like more information.

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How to choose and work with an accountant

In choosing the right accountant, business link suggests that you:

  1. Look at their experience of your sector
  2. Costs and charges
  3. Size and personnel
  4. Efficiency
  5. Additional Services

http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1073963622

It is very important that you check out your accountant to make sure that they are right for you. After all you need to have a good relationship in order for your accountant to help you and  your business to thrive.  Happily we meet more than the criteria given and you can check out our website recommendations to back this up.

Visit our website: http://www.financialgrowthsolutions.co.uk

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How to deal with making a loss

Hi There

In these difficult business times, have you thought about how to deal with a loss in your business? Losses made in your business may be offset against other income if they are related to the trade and we can advise you on how to plan for this and even use your capital allowances as a tax planning tool. Contact us on http://www.financialgrowthsolutions.co.uk for more tailored personal advice.

Visit our website: http://www.financialgrowthsolutions.co.uk

Angela

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