Hi.
If a director has a negative DLA (ie the company owes the director money) now can the director take the cash out the business as he/she pleases provided their is cash available to do so? Would there be any tax implications
thanks
stuart
Hi Stuart, that's right if the dla is a credit balance, ie the director is a creditor of the company then usually the director can take what is owed and as you say there would be no tax implications. The only time it may be considered incorrect for the director to take the money is if it was known the company was going into receivership and there were other preferential creditors.
This is one that always causes issues as on the face of it the situation doesn't seem fair although it is when you think through the transactions
The director either loans the company money directly from taxed income, does not reimburse suffered expenses or does not take their salary out of the company but pays their tax on it as if they had. Therefore the company owes the director money.
To repay the money though the company can only do so from taxable profit as its a capital withdrawal rather than an expense.
In my experience clients will invariably get confused by this as they assume that they are withdrawing their own money so why has the business been taxed on it. They forget that they gained relief on the money in an earlier period.
Namely, the expense was recognised for non taken salary, the unreimbursed expense or the expenditure to which the loan related in a prior period which reduced tax then.
The company will pay tax on the profit which allows it to repay the capital loan but the director will not pay any further tax on the withdrawal themself and just needs to be aware that the relief was given in an earlier period which is why they are paying business tax now.
If they did not then the business would efectively be getting relief from the same expenditure twice.
Hope that makes sense.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Morning, what if they take a large lump sum plus their minimum wage when there are other people who have loaned them money. The regard to pay them back is nil and to the detriment that creditors and contractors are not being paid on time / very late?
but is not the director also one of the people who has loaned the company money?
There is an argument that the director is prioritising one creditor over others which may effect the companies ability to extend credit.
Also, if the company goes into liquidation that any withdrawal may be viewed as the director using personal knowledge to safegaurd their own money so lifting the veil meaning that the creditors would be able to pursue the director personally for the debts of the business.
A good director will put paying their other creditors first as their role should be a fiduciary one of care for the business, not themselves (similar to a parent child arrangement). That said, if they choose to repay themselves before creditors then provided that such does not cause the business to collapse the issue is surely a moral rather than regulatory one.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi Shaun. I was under the impression (maybe falsely) that owed wages can be taken out before considering other creditors and would not be frowned upon if the business was in trouble. If this scenario happened could the Director be held liable personally if it came to light? I've seen advice to do so on a business forum and your post made me think.