Loans from firm can lead to tax charges
RN writes: My business partner and I run a successful company. We have never taken a full salary but, instead, tend to draw money from the firm every quarter and periodically declare a dividend. Over the past year we have drawn out more than the declared dividends and have loan accounts owing to the company. Do we need to repay the cash?
A lot of small business owners take a small salary and top this up with dividends, as it has historically resulted in a lower overall tax charge, writes Jon Dawson, partner at Kingston Smith LLP. It looks like you have fallen behind with declaring your dividends and this has created an overdrawn loan account.
You have a number of options:
■ If the company has sufficient profits, you can declare a new dividend to clear your loans;
■ You can put through additional salaries, paying PAYE and national insurance, and use the net pay to clear your loans;
■ Repay cash into the company.
Your personal finances will dictate the best course of action. If you have personal funds to make a repayment, this wouldn’t give rise to a tax liability, which would be the case with salary or dividends.
A dividend is likely to be the most tax-efficient route if you cannot repay the loans, but it can be made only from historic profits.
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If an overdrawn loan account exceeds £10,000 during the year, it is classed as a beneficial loan unless the company charges you interest. This interest needs to be at least 3%, the taxman’s current official rate, to save having to include it on a P11D benefits form.
The company may also incur a corporation tax charge if any loans are not repaid. A 25% tax charge arises on the balance outstanding nine months after the year end, although this is repayable by the taxman when the loan is repaid.
Can I sack staff too stressed to work?
PJ writes: I have a member of staff who has been off work for almost four months citing stress as the official reason from the doctor. Is there any possibility of getting this employee back to work or can I dismiss him?
Employers have a legal obligation to ensure the health, safety and welfare of their staff, writes Peter Done, managing director of Peninsula. Stress can be caused by an overload of work, bad workplace relationships, a lack of support, and a negative working environment. Stress may also be caused by outside factors. However, where this affects an employee and his work, employers are still obliged to address it.
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As the worker’s doctor has cited stress as the reason for the absence, the employer now has a duty to take steps to manage the problem. Stress can constitute a disability under equality legislation and the employee will be protected from discrimination because of this, so a dismissal is likely to be discriminatory and unfair.
Before a dismissal can take place, employers need to show that they have taken all reasonable steps to help an employee return to work. This could involve them showing that they have considered adjustments to the job, they have been communicating with the employee during this process, they have offered occupational health and counselling services and they have considered a phased return but the employee is still unable to come back. Medical evidence is likely to be important at this stage to show whether there are any adjustments that could reasonably be made or whether there is any possibility the employee will return.
For a dismissal, the employer still needs to be able to prove a fair reason, such as conduct or capability, and a fair procedure needs to be followed. This is extremely important in your circumstances because you are already aware of the stress and the procedure has to take account of it and be adapted, or diluted, to be fair and reasonable. Again, this will be a correct forum in which to ask the employee if there are any adjust- ments that will encourage his return to work and, if any are identified, these can be implemented within the stages of a disciplinary process.
Kingston Smith LLP, the chartered accountant, and Peninsula, the employment law firm, can advise owner-managers on their problems. Send your questions to Business Doctor at bizdoc@kingstonsmith.co.uk, write to The Sunday Times, 1 London Bridge Street, London SE1 9GF, or fax to 020 7782 5765. Advice is given without legal responsibility.