Money drawn from a company by directors can be accounted for in several ways – as payments for expenses, as salary or remuneration payments, as dividends (where the directors are also shareholders) or – if none of the above apply – ultimately as directors loans.
The default position in a company where money has been withdrawn by directors is that such monies should be regarded as a debit to the directors loan account unless they can be accounted for otherwise.
- a salary could be justified by an employment contract, payslips and tax returns.
- remuneration can be justified by reference to a consultancy agreement or a service level agreement (dependant on the service period and whether shareholder approval has been obtained).
- payments for expenses would be ordinarily justified by reference to the appropriate expense claim documents and receipts or invoices.
A dividend payment would have to be supported by a Board Resolution to declare a dividend and this could only be legitimately passed if sufficient distributable reserves exist within the Company.
Otherwise, any payment to directors will likely be accounted for as a director’s loan and thus may lead to an overdrawn Director’s loan account, which may require Shareholder approval..
If you would like to discuss any aspects of these changes (or any other changes introduced by the Act as mentioned in the previous blogs), please do not hesitate to contact me or my colleagues at Francis Wilks & Jones.
