“Where’s the food?” I asked Jonathan who had explained the unwelcome diet implications of me having overdrawn my loan account in Lyra Enterprises Ltd.
This discussion started as I had helped myself to 400 grammes of dog biscuits that were left on the kitchen worktop which had tasted wonderful at the time but I was now suffering the after effects! Jonathan had told me that my overeating reminded him of discussions he had with clients who had overdrawn their director’s loan accounts.
Director's loan accounts - going overdrawn in terms of dog biscuits
This accounting jargon left me a little confused so I asked for a more understandable explanation of the problem.
“It’s like this Lyra: your business made 100 biscuits in profits in your first year of trading to 31 March 2021 and you are looking to make 100 biscuits in the second year. I know that you have eaten all one hundred biscuits you made in year one and it is more than likely that, as well, you will have eaten all the biscuits you will have made since then.”
At this point I had to remind him that I am a Labrador, also known as a dustbin on legs, so of course I had eaten all the biscuits I had earned to date.
And then the bombshell!
“The problem is that you will owe those hungry people at HMRC 19 biscuits in tax on your first year profits (so you should only have eaten 81 biscuits) and they will want them by 1 January 2022. Any biscuits you eat are treated as a distribution of profits and you must always leave biscuits available to pay HMRC the tax on those profits. If you eat everything then you will owe the company the biscuits it needs to pay HMRC. In other words, your director's loan account with the company will become overdrawn.”
At this point I was starting to feel a little queasy (and not just because of those worktop biscuits) only to feel worse when Jonathan went on to explain, “And if you do not pay HMRC their 19 biscuits on time, they will also want you to lend them a further 6 and a bit biscuits on 1st January 2022.”
Even I can work out that that is a total of 25 biscuits that I do not have.
“So, what can I do to ensure I can pay HMRC on time?” I asked.
Lyra's diet plan
Never wasting an opportunity to prepare a spreadsheet, Jonathan set out the following diet plan assuming a start date of 1 July 2021 to ensure I was back on track by 31 December 2021 and had biscuits set aside to pay HMRC:
I am clearly going to be a very slim Labrador by Christmas!
As I have learnt my lesson on the perils of overeating, I asked Jonathan for a solution to stop this happening again.
“Fortunately for you Lyra, those clever people at Xero have developed software that will allow you to see how many biscuits you have made each month and you can then put aside (I know it’s tough) the biscuits HMRC will want down the line. This way, you will only ever eat the 81 biscuits you are allowed to eat and not have to go on such a stringent diet!”
As I view the next 6 months of short commons, I wish I had spoken to Jonathan much earlier and had implemented Xero to keep me on track. Perhaps I should start a “Just Giving” page asking for biscuits to be sent to me over the next 6 months!
Need more advice?
If you would like information on how Xero can help you run your business and to avoid the crash diet approach, please get in touch with the lovely team at Rowdens who will be only too pleased to help you.