RTI and Directors Loan Accounts

The new RTI regime (Real Time Information) is just around the corner now and payroll is about to change for ever. Accountants and payroll agencies are getting to grips with the new reporting requirements and trying to iron out all the quirks and anomalies that are bound to surface once the new system is in regular use.

One of these is undoubtedly how to operate RTI for people who run their own companies. Such people normally take a notional salary of around £7,500 per annum to avoid tax and NI and only pay themselves quarterly or annually. How will this new regime affect them?

Well they still need to report their salary under RTI even though no PAYE is due. They also need to report their working hours (as this is to pave the way for Universal Credit when it comes in). Importantly, they will need to use payroll software from now on if they are not already doing so, even if they are the only person on the payroll.

Fortunately there will be an option to make RTI submissions on a quarterly or annual basis, so hopefully it will be a fairly pain free process. Most payroll software handles RTI automatically so it should entail no more than the click of a button.

The real problem is with overdrawn loan accounts. If you take money out of your company’s bank account in advance of the next dividend or expense claim, or even just as an ordinary loan, how do you prove it was for this and not salary?

HMRC may well try to say that it was salary and impose penalties for not making a Full Payment Submission on or before the date the money was actually taken. The trouble is that a director is deemed to have been paid salary on the earliest of 4 dates:

a) when he/she becomes entitled to the money;
b) when the salary is recorded in the accounts;
c) when he/she is actually paid the money; or
d) when the money is made available by the company

Normally you would use d) as this is when the salary is credited to the director’s loan account, but what if your loan account is in the red? You cannot then claim that you were only taking money that the company already owed you. In that case, c) would become the earliest date.

True, you could say that it was a loan (or a further loan) but would that wash if there was no paperwork? It would be your word against theirs. If you lose the argument, you could face penalties for not complying with RTI.

Not only that, but under the Companies Act 2006 a company needs the approval of its members before it can lend more than £10,000 to a director, even if that director happens to be the sole shareholder. Has the necessary resolution been passed? Has the correct procedure been followed to pass the resolution? Do the Articles even allow it?

Directors who take large sums out of their company willy nilly would be well advised to get the paperwork in order from April onwards if they wish to avoid repercussions under the new RTI regime.

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