All too often, directors treat the company bank account as if it were their own personal funds, and just help themselves to monies as and when required, just as they would have done if they were still a sole trader.
However, these funds belong to the company which is a separate legal entity. If the directors have lent money to the company in the first instance, there is no problem. However, if there are no such reserves to draw on, this can cause a problem. The withdrawals could possibly be classed as “dividends” but there needs to be sufficient profits in the company, and this profit is after any potential corporation tax that might be payable. Management accounts need to be available therefore to justify dividends. The dividends will also likely give rise to personal tax liabilities in due course, and this could come as a nasty shock.
It could be payments of “salary”, but this would be classed as after tax and employees national insurance, and the company may also incur employers’ national insurance.
It could be a loan to the director, but if this is not repaid within nine months of the year end, a “loan” of 33.75% of the outstanding balance needs to be made to HMRC. It is not possible to repay just before the year end and borrow it back shortly after the start of the new financial year either.
There may also be personal income tax on a benefit in kind if no interest is paid, or if interest is paid below the official rate of interest as defined by HMRC.
It is therefore essential to monitor directors withdrawals from the company very closely throughout the year.
