Being a Company Director
Running your company as a director is very different to being a sole trader...
Just because you own your company doesn't mean you own everything the company owns.
Sole Traders are the company. The person and the company are indistinguishable. That isn't the case when you own a Limited Company.
A lot of directors don't realise this and treat the property of their business as their own.
The key thing to remember is that a Limited Company is a completely separate legal entity to the owner(s).
Being an entity in its own right, you cannot treat the company's assets as your own, such as drawing out £50 from the business bank account.
You are 2 separate beings with your own separate possessions.
Common Mistakes Directors Make and Practices You Should Adopt
Taking Money Out of the Business
As mentioned before, you can't just take cash out of the business because you own the business.
The bank accounts and their contents belong to the business.
You can take a salary through your payroll where the necessary tax deductions are made, you can take dividends provided the company has the profit to do so; anything else goes into your Director's Loan Account, which we'll talk about further down.
Personal Purchases 'on The Business'
It's easy to be of the mindset that you can pay for a takeaway on the business card, or order your new teatowels and Christmas Presents from Amazon on the business account.
If you do this, similarly to taking cash out, the amount goes into your Director's Loan Account and may have tax implications.
Your accountant may charge you more for processing all of your personal purchases appearing on your business accounts, as each and every transaction is extra work, and the 'snapshot' of your business's financial standing will be skewed by the purchases.
Business Bank Accounts should only be used for the funds in and out of the Business. Remember, it is a separate entity to you and you wouldn't just use a friend's bank account. If you did, they'd certainly keep track of what you owe them, ie The Director's Loan Account!
Business Purchases Reimbursed
On the other side of the coin to personal purchases on the business, you may pay for some business expenses yourself then reimburse the cost to yourself or an employee.
This is ok, but you still need the invoice or receipt, and you need to maintain the records as you always should.
Ideally everything should be invoiced to and paid by the business, but where odd reimbursements are made, make sure you submit the relevant documents.
The Director's Loan Account
Anything you take out of the business that isn't legitimately accounted for in the business accounts, such as taking cash out to buy a takeaway, gets assigned to your Director's Loan Account.
Similarly, any money you put into the company goes into your Director's Loan Account, either reducing the amount you borrowed from the company, or creating a liability that the company owes to you.
There are tax implications, if at the end of the financial year, you owe money to your company.
It becomes treated as a loan and may be subject to interest charges. The company may have to pay tax on the Corporation Tax Return for any balance you owe, and you may owe taxes as an individual for the income.
For this reason it is advised not to owe your company anything on your Director's Loan Account wherever possible.
Also, be aware of Bread & Breakfasting Director's Loans.
https://www.gov.uk/directors-loans/you-owe-your-company-money
Bed and Breakfasting: A Directors Loan Pitfall
What is Bed and Breakfasting?
Bed and breakfasting is a financial manoeuvre that involves temporarily repaying a directors loan to a company just before the end of the tax year and then immediately borrowing the same amount back. Essentially, it's like checking out of a financial “bed” (repaying the loan) and then checking back in (borrowing the funds again) the next day.
Why Do Directors Engage in Bed and Breakfasting?
Tax Avoidance: Directors may use this strategy to manipulate their tax liability. By repaying the loan before the tax year ends, they avoid paying tax on the outstanding balance. Then, by borrowing the funds back, they effectively reset the loan without incurring immediate tax consequences.
Avoiding S.455 Tax: In the UK, when a company lends money to its director (or a close associate), it's considered a “benefit in kind.” If the loan isn't repaid within nine months of the company's year-end, the company must pay a tax called S.455 tax (also known as the “close company loan charge”). Bed and breakfasting aims to sidestep this tax.
Why Should You Avoid It?
Tax Authorities Are Watching: Tax authorities are well aware of bed and breakfasting tactics. Engaging in such practices can raise red flags and lead to investigations or penalties.
Ethical Considerations: While it may be legal, bed and breakfasting can be seen as an unethical way to manipulate the tax system. It undermines the spirit of tax laws and fairness.
How to Avoid Bed and Breakfasting:
Plan Ahead: If you need to borrow from your company, plan the loan carefully. Avoid last-minute maneuvers to repay and re-borrow.
Consider Alternatives: Explore other financing options, such as salary or dividends, rather than relying solely on directors loans.
Remember, transparency and ethical financial practices are essential for maintaining trust and credibility, both personally and for your company.
https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm61630
Dividends
Dividends are sums of monies taken out of your company as a return for your capital investment in it, your shares.
You may take dividends several times per year, or once per year, but...
The company MUST have the profits to pay the dividends. If your company does not have the funds available to pay them, the dividends are illegal.
If the company doesn't have the equity to pay the dividends, apart from being illegal, you will have the amount charged to your Director's Loan Account.
Dividends are not a business expense, and so are not recorded as such.
They are always paid after tax. So Corporation Tax is paid on the dividend amounts, along with the rest of the company profits, before they are paid to shareholders.
There is an annual tax-free allowance on Dividends, but anything over the allowance has tax implications for the individual and they will have to complete a Self Assessment Tax Return to declare the income and pay the relevant income tax.
Dividends are basically shares of the profits, after tax, to the shareholders.
There are several rules and requirements governing Dividends which you can look through on the Gov website.
More guidance can be found on the Gov website, but it doesn't really go into the items discussed here, that's why we made this little guide.
Still, you should absolutely take a look at your responsibilities there, and they also have a few tools to help you.