What is a Directors Loan Account?
Any transaction between the company directors and the company itself needs to be fully accounted for. Directors salaries, dividends and expenses are obviously recorded, but so too must any other monies paid to directors from the company and from the company to directors in the form of loan.
…it is money that you as director borrow from your company, and will eventually have to repay
…money a director lends to a company to help with start-up costs or to see it through cash flow difficulties. As a result the director becomes one of the company’s creditors.
So if, as a Director, you do not borrow money from your company or if you haven’t loaned your company any money your Directors Loan Account will be zero.
The Basics
The Directors Loan Account will show monies loaned to the company by a Director and, as such, will identify the director as a creditor.
It is perfectly fine to charge the company interest on the loan a director makes. The company will treat such interest as a business expense and will deduct any income tax at source. However the company will pay no corporation tax on the loan. The director will need to declare any interest they charge on the loan as personal income.
All of this is fairly straightforward. It becomes more complicated, however, if a director borrows money from the company. This will result in an overdrawn Directors Loan Account.
A director may want to borrow from the company to cover one off expenses and so supplement salaries and dividends. The company may or may not charge the Director interest on this loan. The key thing to remember here is that if the interest is below the official rate the discount may well be considered as a ‘benefit in kind’ by the HRMC. So, the director may be taxed on the difference between any discounted rate and the rate set by the company.
A Director may borrow any amount from the company on the basis that there is due consideration for the company’s cash flow needs. However, any loan over £10,000 will be treated as a ‘benefit in kind’ so the same HRMC rules as mentioned above will apply. Also any loan over this amount will need the approval of company shareholders.
Paying back loan from the Company to a Director.
A Directors Loan must be paid back within nine-months and one day of the Company’s end of year accounting. If it is not there will be some heavy tax penalties. Any unpaid balance at that time will be subject to a 32.5 per cent corporation tax charge (the S455 tax). This can be claimed back, but it can be lengthy process. Also having an overdrawn Directors Loan Account whilst the company is insolvent has some major tax implications.
Writing off an overdrawn Directors Loan Account.
Yes you can, is the short answer. However, it may not be as easy as you think.
In a “close company”, that is one with fewer than five shareholders and providing the director in question is also a shareholder, an overdrawn director’s loan account can be treated as a distribution of profits and written off. If the director is not a shareholder, the outstanding balance will be taxed as employment income and will need to be declared by that director.
If the company goes into liquidation the liquidator has a legal duty to pursue any possible option that could increase the repayment due to the company’s creditors. Thus they may well review a Director’s Loan that had been previously written off.
Key Points
A Director may make a loan to a Company in the form of start-up capital or for the purchase of assets. If interest is charged by the Director this will need to be shown in their personal tax returns.
A director may receive a loan from their own company provided that it is not in financial difficulty.
Shareholder approval is required for loans over £10,000
An overdrawn director’s current account that is not repaid is treated as an outstanding loan and this may create tax complications for both the company and its director.
When a director is made a loan that is left outstanding for more than nine months after the company’s accounting period end, the company will be required to pay tax under s.455 CTA 2010 at a tax rate of 32.5%.
If the overdrawn (debit balance) on a director’s current account with the company exceeds £10,000 it is treated as an employment-related loan and it becomes a P11d benefit.
Where a director makes a loan to a company that is written off a number of different tax consequences may well apply.
HMRC instruct its staff to examine directors’ private expenditure during the course of an enquiry into a close company’s books and records. In most cases, the company will be expected to produce a transaction history of any director’s loan or current account.
Paying back a Directors Loan before the required time period only to borrow that amount again after the accounts have been submitted will we raise alarm bells. This so called ‘bed and breakfasting’ activity and is frowned upon by the HRMC.
Summary
A Directors Loan Account needs to be carefully managed and even more so if it is overdrawn. There are numerous taxation issues, including penalty charges, that could arise if it is not.
As always it is best to seek the advice of a professional when it comes to your company’s accounts and tax returns. GW & Co Ltd, offers Fresh Thinking, Friendly Advice for Your Business Success. If you’d like to talk about the issues raised in this article or any other accounting challenge facing your business, please do not hesitate to get in touch.
Tel: 01326 378288
Email: info@gw-accountants.co.uk
