As a director, do you owe your company any money and, if so, do you know the potential consequences for not repaying the amount?
Since the availability of bounce back loans and CBILs, a common feature in companies we are asked to advise upon is the presence of an adverse director loan account (“DLA”) where a director has drawn funds above and beyond their remuneration package in order to address personal commitments or just to acquire luxury items. This creates a debt, which is repayable to the company.
However, what about the other potential issues arising? These include:
- HM Revenue & Customs can determine a DLA as income and assess a tax liability based upon the unpaid balance, in accordance with section 455 Corporation Tax Act 2010. This assessed tax liability can be held against a director
- The Redundancy Payments Service will look at this as grounds to reject your claims for entitlements as an employee of an insolvent company. While the basis of their refusal to entertain director claims is wrong, in law, until it is challenged they will use a DLA as sound reasoning for not paying a director. This could amount to several thousand pounds in many cases that a director loses.
So, what can you do when confronted with this situation, particularly if there is an insolvent situation looming?
- First, ensure the balance is correct. All too often a DLA becomes a “Dumping” ground for unallocated accounting entries. Make sure you have an agreed balance.
- Does the company owe you money? If you have paid for goods or services using your own funds or credit card, have these been posted to the DLA? This may also include your employee entitlements, in terms of wages and accrued holiday pay.
- If you can, repay the agreed balance, which in turn prevents the Redundancy Payments Service from using an adverse loan from rejecting your employee entitlements.
- Offer to repay the agreed balance to an appointed liquidator by way of instalments.
- Alternatively, offer a one-off payment in full and final settlement.
Settlements (either by way of instalments or otherwise) are always open to negotiation but can make repaying a DLA more manageable or, in the case of a lump sum settlement, remove that burden from a directors’ mind.
The exposure risk of a settlement that is lower than the agreed balance is HMRC could look at a section 455 assessment against the unpaid residue of the loan. It is not a certainty, but it remains a risk nonetheless.
The key message is where a DLA exists, take advice and be prepared before taking that next step.
If you require any advice or assistance on any insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to email@example.com. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.