Income of company director

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  • #31897
    clamar
    Participant

    Any views as to whether payments made to a claimant in this scenario amount to income for CTB purposes? Taking the facts as presented at face value:
    He has been a director of a family run limited company (the other directors are his mother and father) for several years. He has always been too ill to actually work. His contribution to the company has been to take out very large personal loans which he has then passed to the company to assist in resolving financial difficulties. The company has made high weekly payments to him, apparently to repay the loans rather than as a salary. Due to an error, the amount paid to the claimant is considerably more than required to repay the loans. He is not required to repay the excess.
    The LA has treated the payments to the claimant as income and raised an overpayment (they hadn’t been declared), which decision is being challenged.

    #89184
    Kay_Tade
    Participant

    I don’t think this falls under CTBR 31 so would treat as capital, but I would look to treat the loan received from the director as income for the company. I assume the company has stated it’s not making any profit and have no assets?

    #89185
    Anonymous
    Guest

    It’s capital in both directions. If a director loans the company money it shows as a credit in their bank account and as a debit in their liabilities. The company has to repay the director, so on his side the loan is a debit and the repayment is a credit. (It might be the other way round but accountancy was never a strong point!)

    #89186
    clamar
    Participant

    The company claims to be struggling to survive. But it’s managed to give the claimant over £600 per week over a long period. The accountant says that it’s badly mismanaged and has continued to survive by using new loans to pay off old ones. The story is that the loans were taken out in a personal capacity by the claimant because the company could not, or did not wish to, take them out under its own name. My problem is how to treat this £600 per week coming into a household which claims to be too poor to pay council tax. Apparently, the claimant is a director in name only insofar as he doesn’t actually do anything which merits remuneration. Except, of course, he appears to keep the company running by injecting cash.

    #89187
    Anonymous
    Guest

    In certain circumstances HMRC will treat payments to the loan account as earnings rather than as capital particularly where the director is now in credit. You really need to see the accounts and find out what was intially loaned, what was agreed as a repayment plan and what arrangements have been made to pay him earnings. There is a good example on their web site.

    #89188
    clamar
    Participant

    Thanks Chris and Kay for your responses.
    Can I beg some additional help please as some further information has come to light. In fact, contrary to what the LA was led to believe, the claimant is not a director of a limited company. He’s a partner in an unincorporated company. Therefore, I take it that he’s self-employed – is that correct? His share of the net profit is clearly shown as such in the accounts, so that is his income, taking into account whatever is or isn’t allowed as expenses and notwithstanding that he’s taken significantly more than that amount as drawings – is that right? In one accounting year, a fixed asset was sold for a lot of money. I’m assuming that counts toward the net profit for that year for CTB purposes – is that right?

    #89189
    Kay_Tade
    Participant

    Yes, based on what you have now posted, that would mean he is self-employed, the drawings would not count as an expense and the sale of a fixed asset would be income.

    #89190
    Anonymous
    Guest

    Wouldn’t the sale of a fixed asset be capital?

    #89191
    Kay_Tade
    Participant

    True Chris, but he I was thinking along the lines of “other income” rather than income for the business. I guess if the asset was sold purely for use in the business then yes I agree it’s capital.

    #89192
    Anonymous
    Guest

    The original post says the claimant is too ill to work and always has been, so I don’t think he is self-employed. He may be what people sometimes describe as a “sleeping partner”: someone who has invested money to support a self-employed sole trader or partnership and is therefore beneficially entitled to a share of the profits (and has a share of the beneficial ownership of the assets of the business, which would not be disregardeed as he is not actively working). If that analysis is correct, I would say the payments of £600 a week are unearned income attracting no particular disregard, and that there is capital to be taken into account (like the asset that was sold and the cash realised after it was sold, for as long as it hung around – apportioned to reflect his beneficial share)

    Alternatively, if the money he has advanced to his parents is by way of a repayable loan, then rather than having a beneficial stake in the business income and capital he would in effect be receiving repayments of capital. If the total amount outstanding is more than £16,000 the repayments count as his income; if the total amount outstanding is less than £16,000 then both the outstanding loan and the repayments count as capital – see CTB Reg 31(1)

    #89193
    clamar
    Participant

    Thanks all.
    Peter – the situation is much as you describe. I accept that he’s too ill to work. His contribution seems to have been to borrow well over £16,000 which he then loaned to the business. So, I guess CTBR 31(1) bites and the weekly payments in settlement of the loan count as income while the outstanding amount is over £16,000 and as capital (along with the outstanding amount of loan) when the outstanding amount falls below £16,000. If that’s how it is then that’s straightforward enough. Over time, however, these payments amounted to more than twice the amount of the loan. So what about when there was nothing outstanding but the payments were still being made to him? Unearned income? I’m told that this was a mistake but that the other partners do not require him to repay the excess. He spent the money fast, so his bank accounts show only a little capital. The words “voluntary payments” come to mind. I don’t like making value judgements but that idea grates. The accounts show his divisible share of the net profits as a third – in the first year of the CTB claim his share was £60,000 although he took £93,000 from the business according to the accounts. That year included the profit from the sale of the fixed asset (£180,000, so virtually all of the profit). The profit during the other years is significantly less but he continued to receive the weekly payments until relatively recently.

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