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Post Info TOPIC: Funds Introduced vs Director's loans - Ltd company


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Funds Introduced vs Director's loans - Ltd company


Hi There! I have a ltd company, and am the sole director. For now, I fund the business myself and pay most expenses with my own card as the company often doesn't have enough cash. I expense the receipts, and I dont want to get repaid for now (again, the company doesn't have any cash anyway!).  I would have a few questions in particular as I am unsure how I should label the expenses repayment: Director's loan or Funds introduced?.

1- Also, If the company goes bankrupt ideally I would like to be able to claim the loss off of my income tax so I thought I should label it Funds introduced. Am I correct to assume I could claim this back?

2- If I label my expenses repayment fund introduced and the company makes money, if I withdraw those funds one day, will I have to pay tax on those withdrawing? (assuming they wont be more than fund introduced)

3- If I label my expenses repayment as a Director Loan, and the drawings as director loan, can I recover that loan by claiming it off my income tax if the company goes bankrupt?

4- and finally (sorry lots of questions!), what is the difference between those funds introduced and Share premium (right now I have one share of 1£). 

 

Many thanks for your help!

P.

confuseconfuseconfuse

ps: i am using Xero and looking at using Kashflow instead - if anyone has any view on what's better...



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Forum Moderator & Expert

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1) There are basically two ways of introducing money to the business. Either loaning it money or buying shares in it. The term Capital introduced is often used interchangably between the two.

The idea of bankruptcy should not be entered into lightly and any other creditors of the company have as much (sometimes more) claim as the owners over its assets.

If a business owner withdraws funds before declaring bankruptcy then other creditors can pursue the owner personally (through the courts) for repayment of their debt as the director will have lifted the veil of incorporation.

There is no blanket government compensation (as such) for failure however that should not be confused with tax reliefs available for companies over which you have no direct control (such as via EIS,SEED, VCT and SEIS schemes). Also things are different for an insolvent member company that is part of a group plus relief may be available for any shares owned in the company (but not the DLA) so one option may be to capitalise the DLA before liquidation (although you would not be able to do that if the company is already insolvent). Alternatively you might consider selling the company with the loss to someone "in exactly the same field" (losses not being transferable on change of trade) who might be able to utilise the loss that you cannot.

I have no in depth knowledge in this area and only mention the above in passing without any enhanced detail to the options as I believe that you may have been confusing such possible options with a general relief available to you for losses incurred where to the best of my knowledge no direct tax relief exists for money stuck in the DLA.

The major difference between self employment and an incorporated entity is that with self employment it is you personally where with an incorporated entity your exposure (with many exceptions) is limited to the amount that you have invested in the entity.

As you will see from this very short reply this is potentially a complex minefield for which you should seek the professional assistance of a professional accountant with a Chartered or Chartered Certified practice which has experience of your scenario.

2) On the seperate point of withdrawing funds from the business you will not pay personal tax on the withdrawals but you will find that the money you withdraw is from the balance sheet, not via the P&L so withdrawals will be out of after (company) tax reserves.

There will however be no employers or employee's NI contributions and the money does not form part of your personal tax computation as it is simply returning money that you have already paid personal tax and NI on.

3) See (2) above. The DLA is a balance sheet, not P&L item. DLA is not an expense of the business.

4) Share Premium is where the value of your shares is more than their face value. For example. If you have 100 £1 shares that trade at £3 then you would have share capital of £100 and Share Premium of £200.
Capital (funds) introduced is literally that. Money that you have invested in the company and is often (mis)used in reference to the DLA although it more litterally means capital introduced in exchange for shares which is a capital rather than creditor element of the balance sheet so several major ratio's are skewed when looking at debt ratio's. (This would be the focus area of a restructuring in order to make a sick company appear healthier).

Conclusion.
many of the above questions especially in relation to things like share premim accounts are the sort of things that I would expect from medium rather than micro entities. I would strongly advise for you to make an appointment with a good local Chartered practice at your ealiest convenience to discuss your situation and your options.

There are several site members such as Mark (Marks) and Les Howard (Lesohoward) who may be able to offer more assistance but my advice would still be to pay for professional assistance as looking at your questions mistakes could prove costly.

kind regards,

Shaun.


Having absolutely no belief personally in cloud offerings I do not use either Xero or Kashflow but understand both of them to be competent software for micro businesses. You might want to post that part of your post as a seperate question.



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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.



Expert

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Re queries the money you introduced will either be directors loan or share capital.

If the company closes down and your loan account is in credit and you have to effectively write it off you can get tax relief on this from memory but there are a number of conditions that need to apply which dont have them to hand.  Also I think you only get relief on the loss in the year it is incurred and you cant carry it back or forward.

Easiest way to get tax relief is to buy shares and if the company closes you will create a capital loss that can either be used against capital gains in the year or carried forward to be offset against future capital gains.

Re Xero v Kashflow I would say that Xero is the better basically because of cash coding which speeds up processing for a lot of my clients though with Kashflow now having bank feeds in place and their full package being £10 per month v Xero's £20 per month then if you dont need cash coding then Kashflow would probably be better.  I dont fully understand how Kashflow works but aim to get accredited with them in Feb/Mar once the silly season is by.

Mark



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Mark Stewart CA

http://stewartaccounting.co.uk/

Providing accounting, bookkeeping, payroll and tax services to small and medium sized businesses across Central Scotland and beyond.



Forum Moderator & Expert

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Hi Mark,

I knew that you would have further idea's applicable to this scenario.

on the buying shares in the company though just wanted to emphasise one of my points above in that is it not true that if the company is insolvent at the time of the transaction then it can be reversed by creditors (including HMRC) up to two years after the transaction took place so annulling any possible tax benefit to holding shares over holding a DLA.

The issue here of course is that by the time that people need to ask the question is it not usually too late to apply defensive measures?

The poster of course may have the option open to them not to scratch the company but rather to put it on ice (with the DLA tied up) but of course such would depend on expectations of future profitability and such option takes no account of the time value of money.

To my mind selling a sick dog may prove a better option than either killing it or putting it on ice.

kind regards,

Shaun.

__________________

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.

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