Share/Working Capital
Discussion
My business partner and I each put £5000 into our newly incorporated limited company to provide working capital. Having made some sales he's keen to get his initial investment back out because I suspect it was loaned to him by a relation.
This is almost certainly a naive, simple question but what's the correct legal way to do this without it being deemed as taxable?
This is almost certainly a naive, simple question but what's the correct legal way to do this without it being deemed as taxable?
On the assumption that the money he put in was a simple "loan" to the company (rather than the purchase of shares) he should be able to withdraw the money from the company without any tax consequences for either himself or the company.
The important thing to prevent is his Loan Account/Current Account with the company ending up in a situation where he owes money back to the company. In that case, the Inland Revenue will want some tax (Section 419) and it is also technically illegal under Companies Act rules.
The important thing to prevent is his Loan Account/Current Account with the company ending up in a situation where he owes money back to the company. In that case, the Inland Revenue will want some tax (Section 419) and it is also technically illegal under Companies Act rules.
The same as you would in any accounting system - manual or computerised.
If the director loaned money to the company, say £5,000, then the original entry would have been
Debit - Company bank account £5,000
Credit - Director's Loan Account £5,000
If the company takes the £5,000 back, then the entry is:
Debit - Director's Loan Account £5,000
Credit - Company Bank accouny £5,000
If that is all that happens, the Inland Revenue will not have any interest in the transaction. Where they do get interested would be if the director drew a cheque or a series of cheques from the company bank account which exceeded the original £5,000 he put in. At this stage, the Inland Revenue DO get interested because they will see the director drawing money from the company which should be liable to tax and possibly National Insurance. If the director does not resolve the situation by putting the money back or declaring the excess amount as a salary payment and paying the relevant PAYE and NI, then the Inland Revenue will levy an excess tax charge (called a Section 419 assessment) on the company. As I said earlier, "overdrawn" Director's Loan Accounts such as this also contravene Companies Act regulations.
Hope you find that of use.
If the director loaned money to the company, say £5,000, then the original entry would have been
Debit - Company bank account £5,000
Credit - Director's Loan Account £5,000
If the company takes the £5,000 back, then the entry is:
Debit - Director's Loan Account £5,000
Credit - Company Bank accouny £5,000
If that is all that happens, the Inland Revenue will not have any interest in the transaction. Where they do get interested would be if the director drew a cheque or a series of cheques from the company bank account which exceeded the original £5,000 he put in. At this stage, the Inland Revenue DO get interested because they will see the director drawing money from the company which should be liable to tax and possibly National Insurance. If the director does not resolve the situation by putting the money back or declaring the excess amount as a salary payment and paying the relevant PAYE and NI, then the Inland Revenue will levy an excess tax charge (called a Section 419 assessment) on the company. As I said earlier, "overdrawn" Director's Loan Accounts such as this also contravene Companies Act regulations.
Hope you find that of use.
Whilst more familiar with partnerships than limited liability companies, I would echo everything that Eric has said and add another caveat.
Partners/Directors current accounts are a notoriously emotive issue, leading to considerable ill-feeling between partners/directors if there is a appearance of inequality in funding working capital. I would suggest that you both, to the extent that you are able match each other's working capital contribution
Partners/Directors current accounts are a notoriously emotive issue, leading to considerable ill-feeling between partners/directors if there is a appearance of inequality in funding working capital. I would suggest that you both, to the extent that you are able match each other's working capital contribution
clapham993 said:
Whilst more familiar with partnerships than limited liability companies, I would echo everything that Eric has said and add another caveat.
Partners/Directors current accounts are a notoriously emotive issue, leading to considerable ill-feeling between partners/directors if there is a appearance of inequality in funding working capital. I would suggest that you both, to the extent that you are able match each other's working capital contribution
Hear Hear
Gassing Station | Business | Top of Page | What's New | My Stuff