Drawings for Director?

Drawings for Director?

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A client is a sole director and is drawing money on a regular basis from her company without going on the payroll. Can she put all these drawings down as dividend? What is the tax position?
Jennifer Bray

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By User deleted
31st Dec 2006 16:57

Watch out, watch out......HMRC are about.
Your client needs to regularise the position asap. HMRC are getting pretty hot on ensuring that correct procedures are followed where money is "drawn" as dividends - minutes, dividend vouchers etc.

I would advise her to immediately set herself up on the payroll. A small salary of say £100 per week will ensure that she has NI contributions credited for each year.

The remainder could be taken as dividends - but with the necessary paperwork in place and with a review of management accounts to ensure that there are sufficient distributable reserves.

The company cannot loan money to a director but there is de minimus limit of £5000. So she could, for example, draw her weekly salary, pay herself the tax free mileage allowance for well documented busines miles, and set the other "drawings" against her director's current account. When the balance on the overdrawn director's account reaches £5000 then, if possible, vote a dividend. A better way would be to vote the dividend first and draw funds against the dividend.

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By User deleted
03rd Jan 2007 13:32

Min wage for a director?
Are you sure about that marc?

I didn't think min wage applied to directors remuneration, can anybody confirm this?

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By User deleted
03rd Jan 2007 13:40

RE: Minimum wage
I believe that the minimum wage rules do not apply to directors, if there is no actual contract of employment or agreement.

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By AnonymousUser
03rd Jan 2007 11:30

Not only ... but Also
Steve is entirely correct - you must make sure the paperwork stacks up.

However the company's situation also needs to be taken into account. I assume that ther are no IR35 problems or else voting dividends will be of little use.

You could vote a bonus through the payroll (assuming there is actually a scheme set up) which would cover the payments but then you have the problems of employer NI and also finding the money to actually pay the tax and NI over to the Revenue.

Please be aware that S 447 ITEPA 2003 may become a problem.

See the following article and any subsequent comments for details:
https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=162817&d=1032&h=1019&f=1026


Simon

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By User deleted
03rd Jan 2007 11:42

also watch distributable profits and s419
Before declaring a dividend the director needs to be satisfied that there are distributable profits available to pay the dividend (i.e company is profitable) - profits are after corporation tax. Perhaps include a paragraph in the directors meeting minutes or the directors resolution recommending the dividend showing that at least this has been considered.

The other comment I have concerns the loan account going overdrawn. If at the end of the year the loan account is overdrawn then there is a charge to section 419 tax at the rate of 25% on the overdrawn amount to be reported on the corporation tax return. This can be relieved to the extent the loan is repaid within 9 months of the year end otherwise it is payable on the normal due date for corporation tax and becomes repayable nine months after the end of the year in which repayment takes place.

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By User deleted
03rd Jan 2007 13:08

Minimum wage
You must also be aware of the minimum wage. Assuming your client is a limited company the director should receive the minimum wage reflected to their hours worked.

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By AnonymousUser
05th Jan 2007 12:59

NO NMW for Directors
There is no need to ensure NMW for Directors at all, with or without a contract . I asked my local (York )area office the very same question in October.

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By judexyz123
09th Jan 2007 23:42

Drawings for Directors
Directors are legally employees of the company - irrespective of whether he/she is a sole director.
It is imperative that the company shows a realised profit after tax in order for cash dividends to be distributed therefore it might not be prudent to first vote a dividend followed by withdrawals of fixed amounts as drawings from the current account of the Director if this is the only amount he/she lives on because in the event of the company making a loss the Director would have nothing to withdraw.

Do remember that drawing money on a regular basis form the company would eventually result in the director having to pay Income tax because he/she must declare all income whether they are drawings or salary; therefore the tax position is simple - record director's remuneration and charge this to the P&L account as an allowable expense. This would result in the business paying less corporation tax and the director paying income tax. Ultimately, this would prevent reasons for enquiry.

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By judexyz123
10th Jan 2007 20:00

NMW and directors
Company directors who do not have a contract of employment do not have to be paid National Minimum Wage (NMW).
Inland Revenue focuses on the loss to the Exchequer when dividends are distributed from profits as salary. Therefore the records must indicate the status of the Director because it is possible for a Director to be also an employee of the company in which he/she is a director- this position is determined by the existence of a contract of employment as indicated above.

If a person is a Director and does not have a contract of employment and he/she performs work for the company then he/she is an officer of the company irrespective of whether he is the sole director, therefore he/she will not be subject to NMW.

The decision rule is based on whether the person has a contract of employment or intends to have a contract of employment.

The director should not enter the drawings on the payroll if he/she does not have a contract of employment.

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By flurrymc
10th Jan 2007 10:52

NMW for director?
Sarah, have you got that advice in writing? It disagrees with the agreed statement issued by the Tax Faculty in September 2000, Taxguide 7/00.

If a person is a director and he does not have an explicit employment contract, then he is highly unlikely to be subject to the NMW legislation even when he carries out a wide variety of activities. These might include, for example, working in the company’s shop. Such activities can be done in his capacity as an office holder (director), rather than as a worker. If a director has an explicit employment contract he will be within NMW in respect of earnings under that contract as he and the company will then have chosen to create a worker/employer relationship alongside the director/company one.

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By AnonymousUser
11th Jan 2007 11:11

NMW for Directors
Dennis,
No, I don't have it in writing, and after reading the comments of others I will enquire again. I inherited a payroll client in October, 2 directors paying themselves £100 p/w. As thay are the only full time employees, and their business is open and manned for up to 50 hours a week, I asked them if they were aware of NMW, and called the York office. (I assumed that they do have a contract of employment as they have a PAYE scheme, which I now look after.) I asked the nice man at the IR if they should be receiving NMW, and he said it did not apply to directors. I will check again and speak to my clients accountant, its probably something for them to deal with I think?
So, thank you.
Sarah

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By AnonymousUser
11th Jan 2007 17:14

Dennis is correct
This advice has been the accepted wisdom since NMW came in to force.

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