Contractors' Questions: What if I used company cash for personal costs?

Contractor’s Question: I took funds from my tech company’s bank account to cover some unexpected costs that I incurred personally and now, as of the financial year-end, I owe it £24,000. Fortunately, I doubt I’ll need to use any more cash from the company but I am currently unable to repay it what I owe. I’m the sole director and shareholder so there’s nobody else to turn to. What should I do?

Expert’s Answer: The director’s loan account you have is overdrawn and this will impact both your individual tax liability and the company’s. The accounts disclosures will also be affected.

Your company will have to pay extra corporation tax on the £24,000 loan, unless it gets repaid within nine months of the year-end. The tax will be levied at 25% of the balance still outstanding after nine months. The extra tax will be refunded when the loan gets repaid, but not until nine months after the year in which the refund is made. A big impact on cash flow is therefore likely.

In the event that the company has distributable reserves, you may be able to draw a dividend to credit your overdrawn loan within the nine-month period. This will create additional taxable income.

As the loan represents a benefit in kind, you will have to report it on form P11D as the value of it exceeds the current threshold of £10,000. Unfortunately additional tax for you will follow, as it will for your company - in the shape of a national insurance bill.

Then, the company will need to make disclosures of your loan account in the notes to the accounts. Any amounts advanced to you or repaid, together with the year-end balance, should be shown. You do not need to mention every transaction - they can be aggregated into categories.

In future, ensure that you separate personal and company funds. If however you’re going to need to cover personal costs with company funds again, try to maintain a credit loan balance by reviewing transactions regularly and drawing an appropriately-sized dividend before.

The expert was Jon Dawson, partner at Kingston Smith LLP.

Editor’s Note: Further Reading –

Contractors’ Questions: How to fix paying repair man with company cheque?

Contractors’ Questions: How to duck NI on director’s loan?

Contractors’ Questions: How to take a loan from my limited company?