Avoiding legal issues when planning profit extraction
Directors often have misconceptions regarding their remuneration. This can sometimes have serious consequences. What does a recent High Court decision underline the importance of understanding when taking money out of a company?
Insolvency case
The High Court case of Bass and Ors v Buchanan [2021] EWHC 2740 (Ch) involved an overdrawn director’s loan account in a company providing client representation for actors. Profitability fell significantly and HMRC demanded all outstanding unpaid tax. Remuneration
The director’s remuneration pattern was typical of many small companies, the director taking low salary and high dividends. She drew money monthly from the company via standing order. After some years, there were not sufficient distributable profits to vote dividends to cover monthly drawings and the director’s loan account remained overdrawn.
Where a director’s loan account is outstanding more than nine months after the company year end, the question of corporation tax under s.455 Corporation Tax Act 2010 arises.
It’s a bright line from a tax angle, but in practice boundaries can get muddy, and this happened here. The company accountant asked their client to sign a declaration that the overdrawn loan account would be repaid instead of declaring a s.455 charge to HMRC. The loan was never repaid. The result was that the company was put into liquidation, and its sole director held liable to repay the outstanding balance on the director’s loan account - over £280,000, plus interest.
Communications
This case showed how great misunderstandings can be about the legal position when trading via a limited company. It is crucial the fact that monies drawn from the company are only on account until covered as dividends or salary. Where payments are not made as salary in real time, or if there aren’t sufficient profits from which to pay dividends, by default, monies stand to be treated as a loan.
Tthe company exists as a legal entity separate from its director, and that extracting cash from a company is completely different from taking drawings from a sole trader or partnership business. It’s not a simple ratio of hours worked to monies out; remuneration has to be voted and documented correctly.
Related Topics
-
Delay salary to save tax
As a company owner manager, you decide when to take income from your business. If that’s your only source of income, tax planning is relatively simple but it’s trickier if you have other sources. What’s the best strategy to improve tax efficiency?
-
Loan written off: are you in HMRC’s crosshairs?
HMRC is writing to directors that took a loan from their company that was later written off or released. What should you do if you receive a letter?
-
Cutting the cost of a company car
You want to help your young son replace the ancient car he currently drives. The plan is for your company to buy it but for the running costs to be met by your son. That’s fine with him but is there a more tax and cost-effective alternative?
This website uses both its own and third-party cookies to analyze our services and navigation on our website in order to improve its contents (analytical purposes: measure visits and sources of web traffic). The legal basis is the consent of the user, except in the case of basic cookies, which are essential to navigate this website.