Tax timebomb looms for directors

Many company directors are facing a tax time bomb, according to accountancy firm Price Bailey

The number of small business owners who took a dividend from their company, even though they made a loss, has doubled in a year.

Despite the pandemic, many directors have continued to pay themselves the same dividends as in a ‘normal year’. However, under company law firms are only allowed to pay dividends if they are profitable.

Price Bailey explained some companies have dipped into their cash reserves; others may have used government bounce back loans! However, Price Bailey points out that these are classed as loans on company accounts and must be repaid in 9 months.

Price Bailey’s William Wilson explained: “Directors may not have a complete understanding of their financial position, including whether they have taken illegal dividends until they file up-to-date accounts.”

Turning to the Covid-19 loans Wilson pointed out that if a loan from the company is not paid back within 9 months it triggers a Section 455 tax charge of 32.5%. That is £16,500 on a £50,000 loan. As well as this, if the director’s loan account is above £10k then yes it will attract the 32.5% tax if not paid within 9 months.

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