Directors Loan Account : How does it work?

Let’s face it. Widget Making small business owners care mostly about making widgets for clients and earning money personally. They view taxes as a cash flow drain and cost which should be minimised.

It should be no surprise therefore that a conversation occurs between the business owner and the Accountant. The Advice?

Get paid from profits rather than through payroll.

For most companies, with the exception of a few e-mails, this is all that the Small Business Owner recognises. They take their money weekly and monthly and once a year the Accountant does his thing and tells them how much tax to pay.

The missing bit of course is that profits can only be recognised at the end of an Accounting Period and, unless the business owner is prepared to live on fresh air or savings for 12 months then there has to something else to fill in the gaps.

The answer of course is a Loan Account. The Company lends money weekly or monthly to the Owner and at the end of the year the Accountant establishes the profit, declares the dividend, recognises the tax and nets off the loan against the dividend. “Simples”

The problem of course comes if, as Covid has taught us, these businesses have not generated any profit. How does that get unwound?

The answer comes from whether the Company (complete with bounce back loans) can survive. Liquidation is not a simple quick fix and if Directors ask the right question they will understand, as I am constantly trying to explain to our potential clients, this is not a question of how little can I get away with paying the Liquidator. Any loans taken by the Director will need to be repaid and simply trying to ignore the existence of the Bounce back loan and its effects on the company’s balance sheet will only ever generate further costs for you down the line.

Please let me know if I can help.