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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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Good afternoon A Ltd company was created in 2010 by 2 associates. One

Customer Question

Good afternoon
A Ltd company was created in 2010 by 2 associates.
One of them worked full time on the new company, without pay
The second one went on working for his employee and working week-ends and nights for the newly created company.
A year ago, the second one decided to work half time for his employee and half time for the new company. Both of them started to receive a salary.
They would like to receive differed salaries for the initial phase of the business. What is the best way to do it?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
Employees must have formal Contracts of Employment which set out the duties and responsibilities of both parties. The remuneration basis can be included in these contracts. Basic contracts of employment are available from all good legal stationers. For a quick gander have a look on eBay; you are pretty sure to be able to download one there. The dreaded W H Smith will have them available in any of their stores.
The company and the individuals, directors, employees and shareholders are all separate legal persons, although, of course, the last three can, and often are, the same. However any employment contracts are between the company and the individual and ethically should be privy to those two. I do appreciate that in a small company this may not be easy. It may be necessary to bang a few heads together before a satisfactory position is reached! Unfortunately in such circumstances the whole shooting match can go for a ball of chalk without agreement.
Sorry to be a tad negative, it seems to me that a bit of work will be needed here. I do hope I have helped you to plan ahead with your business.
Customer: replied 2 years ago.

There's no contract. Could we say: director A should receive £100,000 and director B £50,000, all monies to be paid in director's loan accounts?

Expert:  bigduckontax replied 2 years ago.
Well, there should be, especially with the new arrangements.
Remember that if the Director' Loan accounts finish up with the directors owing the company moneys, loans to directors, these must be cleared within a limited time frame to avoid horrendous tax consequences. If, of course, it is merely paying off loans paid in by directors in the past their clearance is perfectly right and proper.
Customer: replied 2 years ago.

Thanks. What are the new arrangements?

Obviously the cooresponding taxes would have to be paid for before being transfered to the DL accounts?

BTW, the DLaccounts are positive.

Expert:  bigduckontax replied 2 years ago.
I am so sorry to be obtuse, but what do you mean by 'new arrangements?' Contracts of employment have been compulsory since 1963, half a century ago!
Paying off directors' loans is outside the scope of both personal and corporate taxation regimes. Here is the advice from TaxAssist Accountants on the matter of directors' loans:
'However, once the available funds are exhausted, the director is in default and therefore a debtor of the company. This can have two implications:
Corporation tax charge - S455
Firstly, if a balance remains outstanding on their loan account at the company’s year end, this can lead to a tax charge on the company called S455. This only applies to ‘close companies’ though- generally speaking a company with less than five shareholders/ directors. The loan account balance must be shown on supplementary pages of the company’s corporation tax return (CT600) and the S455 charge is calculated as 25% of whatever balance was outstanding on the director’s loan account at the period end. The S455 tax is payable nine months and one day from the end of the relevant accounting period.
An overdrawn director’s loan account is effectively an interest-free loan, so S455 is supposed to deter the company from providing such generous perks to its directors. However, S455 is rather unusual in so much as it is temporary- it is repaid back to the company by HMRC, as the loan is repaid by the director to the company. Where the loan is repaid within nine months of the end of the accounting period though, relief is due immediately, i.e. the S455 is never physically paid (although disclosure is still required in the company’s tax return).
Benefit in Kind
The second implication of an overdrawn director’s loan account is that it can trigger a benefit in kind. As mentioned above, an overdrawn director’s loan account is effectively an interest-free loan, so the benefit equates to the interest that would have been due (the calculation of which is stipulated by HMRC). There are a few exceptions, which can mean no benefit arises:
the loan is used for certain ‘qualifying’ purposes by the director, such as buying an interest in a partnership
the company chose to charge the director interest (the tests for this are fairly stringent)
the loan is deemed ‘small’, i.e. it is under £10,000 throughout the year*'
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Customer: replied 2 years ago.

I'm sorry but I didn't want to ask information easily available on the web.

The question is not related to drawing money out of the Director's loans.

My question, expressed in a different way, is the following. The 2 directors have a different way of seeing the situation:

- one considers that their participation has increased the company's value, and little money should taken at this time

- the other one considers it is time to draw a salary for the past years when they worked w/o salary.

What would you recommend? Obviously (correct me if I'm wrong), there is no way to receive money for deferred salaries without paying taxes now. The only reason I mentionned to pay in the DLs was to avoid cashflow problems.

Another way is mixed: pay the difference between the differnt salaries due into the DL of the one who is due a higher salary to reduce taxes.

Case 1: 100k and 50k paid to each director in their DL

Case 2: 50 k paid into one DL

Is my question clearer?.

Expert:  bigduckontax replied 2 years ago.
Receiving moneys for their involvement with the company is great for the company if it is posted to Directors' Loans as it enhances the cash flow.
From the individuals' point of view they have paid moneys into the company, but as a result their efforts have been used to reduce company indebtedness, they do not physically get their moneys back. The other side of this coin is, of course, that they incur no tax on the amounts paid.
Does that help?
Customer: replied 2 years ago.

You have to pay the taxes and NIC at the tme of paying into the DLs, I presume.

Expert:  bigduckontax replied 2 years ago.
If you are paying off existing loans by directors then this is outside the scope of UK taxation. If however, you are effectively paying them a salary by them actually owing the company money then those sums owing would have to bear both Income Tax and NI.
Customer: replied 2 years ago.

Thanks.

BTY, you mentionned 'new arrangements''. That's why I asked what they were.

Expert:  bigduckontax replied 2 years ago.
Perhaps a poor construction in my answer, sorry.
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