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The Danger of Director’s Loan Accounts

A director’s loan will either be a loan to the company or a loan from the company; in this blog we are referring to the latter.

Many business owners pay themselves through a director’s loan account, sometimes called a director’s current account, which is then “tidied” up at the year-end by declaring dividends from profits generated by the business. This works well when the business is profitable as it is flexible, quick, simple and tax efficient when done correctly.

Unfortunately, too often we see owners who have taken drawings through their director’s loan account where the business has insufficient, or no profit or reserves. This means that the company cannot declare any dividends resulting in an overdrawn director’s loan account. This could constitute tax fraud as it would effectively be disguised remuneration (where remuneration which would normally be subject to PAYE/NI, is disguised as a loan to avoid paying this liability).

On top of having paid themselves more than the business can support, they have often done so when there are other creditors the company owes money to who have not been paid, effectively running the very real risk of them being accused of transactions at undervalue, breach of director’s duties and misfeasance. The end result could be:

  • Financial penalties
  • Accusations of participation in a tax avoidance scheme
  • Losing assets, such as the family home
  • Bankruptcy
  • Being disqualified as a director

All too often we speak to directors who are worried, suffering stress and sleepless nights and don’t know how to tackle what seems an insurmountable burden of debt. Quite often such drawings have mistakenly been classed as loans when the funds have been used for business expenses due to poor accounting record keeping.

We can help you by providing:

  • A free initial consultation
  • Clear, easy to understand impartial and confidential advice
  • Reassurance and guidance on classification of drawings
  • A solution to your problem

If you want a way forward with peace of mind and for the stress and sleepless nights to go away or if you have any questions about the insolvency process, please call our Business Rescue Service now on 0800 118 2948

You don’t know what we can do until you ask.

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