Being a Company Director

Common Mistakes Directors Make and Practices You Should Adopt

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?

1. 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.

2. 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?

1. 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.

2. 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:

1. Plan Ahead: If you need to borrow from your company, plan the loan carefully. Avoid last-minute maneuvers to repay and re-borrow.

2. 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.