Remuneration for Directors - why traditional routes may need a rethink for 2021

With the Covid-19 impact on the economy, many previously thriving companies may find it difficult to use traditional patterns of remuneration this year. As a result, the loan account may remain outstanding.

Our briefing below considers how the position can best be dealt with, and looks at the tax consequences of the options involved.

If you have any concerns that your usual mix of remuneration might be impacted by the current performance of your owner-managed business, please do talk to us now to help plan the best strategy for your circumstances.

Excerpts from our briefing - for full details please click on the link below.

Loans or advances from a company can take a variety of forms. Sometimes director-shareholders borrow a specific amount outright as a short-term loan. More often it’s the informal transactions between a director-shareholder and the company, such as cash withdrawals to meet personal expenditure, or personal expenses directly paid by the company, that create borrowing. Where, overall, a director has borrowed more from the company than they have lent to it, the director’s loan account is said to be ‘overdrawn’. Such balances are usually cleared a few months after the year end when profits have been determined, by voting a dividend or paying a bonus.

Even if profits are available to pay a dividend, it may not always be prudent to do so in current circumstances. This could be the case if, for example, there are significant repayment obligations, such as Covid-19 business loans or repayments of outstanding VAT to HMRC. If there are not sufficient retained profits out of which to pay a dividend, any dividend would be unlawful. Recipient shareholders can be liable to repay unlawful dividends to the company, where they know or have reasonable grounds to believe that they are unlawful. In addition, directors may be held personally liable for the amount paid. There are also tax consequences to the payment of unlawful dividends if they are not repaid to the company. HMRC is likely to treat the amount as a loan to the shareholder, and thus potentially within scope of a s455 charge.