Understanding the Role and Responsibilities of a Director in a Limited Company

Posted on March 9, 2023November 3, 2023 by Gareth Atkinson

As a director of a limited company, it’s crucial to understand your role and responsibilities. In this article, we’ll provide you with a comprehensive guide to help you gain a better understanding of your position within a limited company.

What is a Director of a Limited Company?

A director of a limited company is an individual who is employed by the company and has a clear distinction from a shareholder. While a shareholder owns part of the company based on the amount of shares they hold, a director is responsible for the day-to-day management of the company. In a personal service company (PSC), the director is usually the sole director and shareholder.

A limited company is a separate legal entity with its own constitution and articles of association that specify the powers granted to a director and the purpose of those powers.

The Responsibilities of a Director

As a director, it is your responsibility to act in the best interests of the company at all times. Companies House describes this as ‘promoting the success of the company’. While there are no formal qualifications or special skills required to become a company director, you must meet the seven statutory duties set out in the Companies Act 2006, the company’s articles of association, and any service contract put in place between you and the company. These duties are as follows:

Act only in accordance with the powers included in the company’s constitution and articles of association.
Make decisions for the benefit of the company and not yourself, promoting its success at all times.
Exercise independent judgement in all decision-making.
Exercise reasonable care, skill, and diligence, as expected of someone in your position.
Avoid or declare any conflict of interest.
Avoid the acceptance of benefits from third parties or using your position to make private profits.
Declare an interest in a proposed transaction or arrangement with the company before it enters into such a transaction.

Day-to-Day Management Duties of a Director

The day-to-day management of a company is delegated to the directors by its shareholders. However, the company may employ people to help carry out these tasks, such as a company secretary, accountant, or tax specialist.

It’s important to understand terms such as the ‘Accounting Reference Date’ and ‘Accounting Period’. Companies House sets the Accounting Reference Date when a company is first incorporated, and the first Accounting Reference Date is the last day of the month in which the first anniversary of incorporation falls. The Accounting Period is given by HMRC for your Company Tax Return and payment of Corporation Tax, and usually ends on your Accounting Reference Date.

As a director, your responsibilities include ensuring the company is registered for and pays its taxes, submitting an annual Confirmation Statement to Companies House, filing the company’s annual financial statements with Companies House within nine months of the company’s accounting period ending, and paying Corporation Tax due on the company’s profits to HMRC within nine months and one day of the accounting period ending.

Conclusion

In conclusion, as a director of a limited company, it’s important to understand your role and responsibilities. Make sure you meet the seven statutory duties and delegate the day-to-day management duties to other professionals. By doing so, you’ll ensure the success of your company and avoid any legal issues. For more information on starting and running a limited company, check out all of our relevant articles.

Essential Guide to Dormant Accounts

Posted on June 28, 2021November 3, 2023 by Gareth Atkinson

We often find that there is a bit of confusion around dormant accounts. So here at the Accounting Studio, we we’ve taken it upon ourselves to clear a few things up.

Firstly, we should say that if there is confusion, it is not surprising, because what happens to your accounts at Companies House, is actually quite different to what happens at HMRC.

Why a company might be dormant

Being dormant at Companies House means you get to file dormant accounts, which are much simpler than ordinary accounts and therefore cheaper to prepare.

Being dormant at HMRC means you don’t need to file a corporation tax return. Again saving you in fees, and admin.

There are broadly two sets of circumstances that lead to a company being dormant

The company has never traded. It was incorporated but has never actually be used to do anything.
The company has previously traded, but has now ceased. The owner has decided to to wind the company up, which can be for a variety of reasons, and so the company is just going to sit there (dormant) until it is either going to be used again, or is finally going to be wound up

Dormant Accounts at Companies House

At Companies House, dormant accounts mean a very specific thing. It means that the company has had “no significant transactions” in the financial year . It’s a bit of a vague definition, I’ll grant you that.

Retranslate that, if you will, to the company has had NO transactions in the year, except for in a few circumstances.

The following transactions are OK, but if there is anything else at all – interest received, bank fee, payment of dividends, paying corporation tax, receiving money from invoices from the previous year – literally anything and you will not be dormant.

The green-list transactions are

filing fees paid to Companies House
penalties for late filing of accounts
money paid for shares when the company was incorporated

That’s it.

At Companies House – one does not register one’s company as dormant. By that I mean you do not need to tell Companies House that the company is now dormant. What you do instead is, after the year end, assess whether the company meets the definition of being dormant and then file dormant accounts if they are. So you don’t need to do anything up-front, or in advance. It is all after the event.

The problem most people encounter is that it is really really difficult to end up with no transactions. For example, after ceasing trading, you still have to file a corporation tax return, and that return will likely either involve you paying HMRC something, or HMRC paying you back some previously paid corporation tax. This will happen after the year end, and like that [snaps fingers] you’ve lost your dormant status.

Dormant accounts at HMRC

Rather unhelpfully, HMRC do things differently to Companies House. For HMRC you actually do need to tell them in advance you are not trading and that it is dormant for corporation tax. This is so that they don’t issue you with a notice to file a corporation tax return.

The definition is also slightly different, and less strict that Companies House. HMRC generally considers a company or organisation to be dormant for Corporation Tax purposes if it’s no longer carrying out any business activity. If you are doing any of the following you are considered “active” for corporation tax (and therefore not dormant):

carrying on a business activity such as a trade or professional activity
buying and selling goods with a view to making a profit or surplus
providing services
earning interest
managing investments
receiving any other income

More information on whether a company is active can be found here: https://www.gov.uk/guidance/corporation-tax-trading-and-non-trading

The way you make your company dormant for corporation tax is through the submission of the corporation tax return. There is a section in there to tell HMRC that it is no longer active, and so HMRC will duly stop sending out a notice to file a corporation tax return.

Overdrawn Director’s Loan account

Posted on February 24, 2021November 4, 2023 by Gareth Atkinson

Overdrawn Director’s Loan account

What is a director’s loan account?

When businesses are owned and run by the same person (the director is a shareholder) there are very often transactions between the company and the director. This could be the director initially putting money into the business to start it up, or injecting some cash when the company needs it. These sorts of transactions create something called a director’s loan account.

It may also be for wages that have been declared to HMRC but not yet taken, or expenses incurred by the director personally but not yet refunded to them.

The above are all transactions that increase the amount of money that the company owes the director.

However there are transactions that can send the balance in the other direction – simply drawing money out the business without declaring a dividend, or having the company the company pay for something personally for you. These are all obvious types of transaction which will either reduce the amount owing to the director, or will mean that the director actually owes the company some money.

There are other sorts of transactions that can sneak up on directors – illegal dividends are the most obvious transaction we see – where a director has paid more in dividends to themselves that company law allows them to – this would put the dividend in a repayable position.

The typical scenario is where the director has been only really paying attention to the bank account and paying themselves what is in the bank, forgetting that corporation tax is also due (this is incredibly common!)

Should the director owe the company money there are a variety of tax implications that apply.

A history of (tax) abuse

To understand the tax implications of the tax on an overdrawn director’s loan account its useful to know the context and history as to how it arose.

In the past some less that scrupulous directors would attempt to avoid paying income tax (or corporation tax) by lending themselves a large amount of money. As the money was a loan there was not income tax paid on it. This amount would continue to rack up until the directors decided to wind the company up, chalk the director’s loan as a bad debt, write it off and wind up the company.

The directors have the cash, and no impact was due. In our view this was never strictly legal but non-the-less did happen.

Section 455

To combat this HMRC brought in legislation that put the tax burden on the company – what is know as section 455. This means if there is a director’s loan balance outstanding at the year end the company has to pay tax at 32.5% on the increase in that loan. This was intended to ensure that HMRC got the tax even if the company subsequently was wound up.

There are a lot of rules around this, including the ability to get that amount back if the loan is repaid, or income tax paid on it.

Benefit in kind

On top of this s455 there is also something known as a benefit in kind that needs to be considered as well.

HMRC take the view that if you are borrowing money from the company, and not paying any interest on that money you are getting a benefit from the company and should therefore pay tax on the value of that benefit.

Thankfully this is quite a low level of benefit – the benefit is considered to be the tax you have not paid, which given the current official rate of 2.5% means that the overall tax you pay on this is often not all that much. On a £20k loan that interest should have been £500. Income tax at 40% would mean a tax charge of £200.

There is also a national insurance consideration that the company needs to pay on benefits in kind – Class 1a charged at 13.8% on the £500 totalling £69 (this £69 is tax deductible for corporation tax purposes so in reality works out to only cost £55.89). So on a loan of £20k a director might pay £255.89 per year.

The key issue with the benefit in kind that many directors find is not the cost, but remembering to do it, or paying an accountant to file the P11d form at the end of the year.

What Can I do about it?

With an overdrawn director’s loan account there are limited remedies, and non that are pain free.

Here are a range of options

Repay the loan – if it’s under £10k you may be able to repay it then draw it back out shortly after – what is known as bed and breakfasting. This, however is not recommended as there are rules in place to combat it
Declare a “paper dividend” to clear the director’s loan account. This is where you declare a dividend, but pay no cash to yourself. The real sting in the tail is that, despite having not cash from the dividend, you will still need to pay dividend tax. You can only do this if you have sufficient “distributable reserves” to do so (basically profit not yet paid as a dividend).
Declare a bonus to clear the director’s loan account. This is the same as the above option for times where there are not sufficient distributable reserves. You will pay income tax, national insurance and the company will pay employers national insurance on this so its quite expensive.

Here are some things you can’t do

Ignore it – simply – that would be illegal (tax evasion, which once you do anything with it then becomes money laundering – all very serious)
Wind the company up – HMRC would have the right to object and appoint a liquidator. They would come after you personally for the money.

Director’s loans can get quite complex so its important to account for things well and get it right. Cloud accounting software can be a real help with this (FreeAgent is particularly good for this), as can having an accountant who is alert to this issue.

Ultimately, setting up your business in an efficient and structured way can help considerably to keep you organised. Simply being aware of the issue and avoiding making any large dividends at the end of the year often helps.

There is more information to be found here

Being a company director – what do you need to know?

Posted on March 10, 2019November 4, 2023 by Gareth Atkinson

When you become a company director you take on certain legal responsibilities.

Companies House have produced this really useful video about what you need to know about becoming a company director.

Directors loan accounts. Use it, but don’t abuse it!

Posted on September 27, 2018November 4, 2023 by Gareth Atkinson

Directors loan accounts. Use it, but don’t abuse it!

I was recently asked by a client whether he could take out a directors loan from his company, instead of drawing a salary or paying dividends. Its not an uncommon question and in fairness it’s something that did used to work. Sort of…

For those of you who don’t want the detail – let me be short.

NO – YOU CAN’T DO THIS AND YOU WILL GET STUNG FOR TAX IF YOU ATTEMPT IT. DON’T DO IT

There are essentially two facets to the question:

Do you get taxed personally
Does the company get taxed

Do you get taxed personally?

Essentially, if the company grants you personally a loan, without interest being paid, it is treated as a benefit in kind. Basically you are getting an economic benefit from the company, but not paying any tax on it. If this happens you pay income tax on the value of the benefit (which is actually the interest you would have paid if interest had been charged on the loan). The company also pays a type of national insurance called class 1a.

Under £10k, you are correct that the loan is treated as an exempt benefit. As a result there would be no income tax or company national insurance to pay.

Does the company get taxed?

This is the real mine field. There are two main issues here:

1 – Section 455 CTA 2010

Section 455, Corporation Tax Act 2010 is a key anti-avoidance weapon for owner-managed companies. Without it, owner managers could easily avoid a tax charge by arranging for ‘their’ company to lend them funds (as opposed to paying a ‘taxable’ bonus or dividend).

However, s455 levies a tax charge, equal to 32.5% of the loan, where a company makes a loan to you or one of your family members. In most cases, the s455 tax liability falls due nine months after the end of the accounting period in which the loan is made. The company is able to recover the s455 tax if and to the extent that the loans are repaid.

So basically – if the company loans you money, it gets charged tax on that loan as if it was a dividend at the higher rate. If you repay that loan you will get the tax back. If you never repay it you won’t. HMRC also charge you interest during this period and you can never reclaim it.

Under personal earnings of £100k there is no tax benefit, but much more work involved.

Some people have tried to get around this by paying back the loan and then drawing down another loan – this is what is known as “bed and breakfasting”. HMRC are all over this and have rules in place to stop this.

2 – Does the loan ever need to be repaid

Even if you decided that S455 was OK (not sure why you might, given it’s almost always a bad idea), essentially, eventually yes you do need to repay the loan in some way. When you come to wind up the company there will be an amount outstanding to you. To close down the company you will need to either

Repay the loan (getting back the tax levied, but not repaying the interest that HMRC charged)
Write off the loan (It will be treated then as income by HMRC – the type of income will be employment income and therefore you will, as well as needing to pay income tax, you will need to pay national insurance personal, and in the company)
Close the company in an insolvent state – you run the risk of a HMRC investigation with charges of fraudulent trading (which is a criminal offense)

There are lots of other tax rules that interact on winding up such as the Targeted Anti Avoidance rule (the so called anti-phoenixing rules) which further lock down this situation.

With the above in mind I would recommend against taking out a directors loan. You could loan yourself the money in the short term and then repay it using a dividend at the end of the year, but to be honest – you might as well just pay yourself a dividend in the first place and avoid the unnecessary loan step.

Does it ever work?

There is once circumstance where the S455 doesn’t apply and that is where the loan is under £5k, but you still have to think about how that loan will be repaid in the future.

One final thing is that the loan will also need to be disclosed in the accounts, which are on public record, but also with HMRC as well. I’m not sure if this is an issue for you. Personally it wouldn’t bother me but it’s something else to be aware of.

There is some useful additional information here:

https://www.gov.uk/directors-loans/you-owe-your-company-money

What can I use directors loans for

There’s no denying that directors loans are incredibly useful. Of course there are two sorts of directors loans. Loans where the director owes the company money – this is the subject of the above post.

The other, which is incredibly useful at times, is where the company owes the director.

Being able to generate a large directors loan account that the company owes you has potentially lots of benefits.

For starters you can charge interest on that loan. For basic rate tax payers you can receive up to £1,000 personally tax free. Meanwhile, your company can claim this cost against its corporation tax bill.

Furthermore, if you manage to arrange your affairs so that you have no taxable income from a salary, you can claim another £5k (note this doesn’t mean you can only get this if your earnings are nil, its just how you arrange things – we can help with this if you want).

Lets not forget – anytime you repay a loan to yourself, there is not income tax to pay on it.

Its about more than tax…

Directors’ loans are useful in the early stages of the business. I’m often asked what clients should do in terms of paying for things before they’ve had their first invoice paid. The answer is relatively easy

Pay for things yourself and keep a track of it (a bit of a pain admin wise)
Lend the company some money, and get the company to pay for it. Then have the company repay you later on when it has the funds.

The key point here is not to set up the company with lots of share capital (unless you need to for other reasons), which is what I find many clients thinking they need to do. A quick phone call to me tends to get them on the right track.

In summary

Don’t, if you can avoid it, try and pay less tax by loaning yourself money from a company – it doesn’t work – in fact it works out quite expensive.

You can borrow money in the short term, so long as you have a plan to pay it back. Keep on top of it though – don’t forget about it as it will catch up with you

Do think about directors loans from a tax planning perspective – particularly from a profit extraction perspective.

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Category Archives: Compliance and Regulations

Understanding the Role and Responsibilities of a Director in a Limited Company

What is a Director of a Limited Company?

The Responsibilities of a Director

Day-to-Day Management Duties of a Director

Conclusion

Essential Guide to Dormant Accounts

Why a company might be dormant

Dormant Accounts at Companies House

Dormant accounts at HMRC

Overdrawn Director’s Loan account

Overdrawn Director’s Loan account

What is a director’s loan account?

A history of (tax) abuse

Section 455

Benefit in kind

What Can I do about it?

Being a company director – what do you need to know?

Directors loan accounts. Use it, but don’t abuse it!

Directors loan accounts. Use it, but don’t abuse it!

Do you get taxed personally?

Does the company get taxed?

1 – Section 455 CTA 2010

2 – Does the loan ever need to be repaid

Does it ever work?

What can I use directors loans for

Its about more than tax…

In summary

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