Loan account

An overdrawn Directors loan account may become a big issue

It is essential you understand the consequences

always remember a limited company is a separate legal entity.

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Written by:

John A Waller

Director

Updated: April 30th,2021.

Directors Loan Account and Liquidation

A Directors Loan Account (DLA) explained. It shows if the Company owes you money (in credit) or you owe money to the Company ( known as “Overdrawn”).

Many businesses, tiny businesses, have many transactions in the Director’s loan accounts. For example, a Director pays an invoice themselves. Therefore, it shows as a credit in the DLA. Therefore, the same applies when they put money into the business to keep it afloat for cash flow purposes.

A Director’s loan account therefore remains a Creditor, i.e. money owed to the Company’s Director, but a whole new scenario evolves when overdrawn.

Who can have a Director’s loan?

To have a directors loan account. You, therefore, need to be a director of the company to establish a loan.

Why have a Director’s loan?

To create a directors loan, maybe you have a financial need personally and therefore require a loan processed quickly.

Remember, though, the loan has no personal or company tax, and HMRC requires it to be done before the year-end.

An Overdrawn Directors Loan Account and Liquidation?

An Overdrawn Directors Loan account at year-end can then be regarded as a tax-free benefit to the Director by HMRC and taxed accordingly.  If repaid to the Company within nine months of the year-end, then not a problem.

Generally, if the loan account exceeds £10,000, then classed as a benefit in kind and declared on the P11D.

In the event of a liquidation of the Company. The Overdrawn Director’s loan account therefore becomes an asset. The insolvency practitioner can then recover that.

For further reading, please view our page ‘liquidators role with overdrawn directors loan accounts‘.

Can an overdrawn Directors Loan Account be offset?

Situations may arise, particularly with two directors, and one director has a debt due to the company. However, the other remains owed money. Therefore, to offset these balances, the directors must formally ensure it remains in writing correctly, so offsetting can happen.

Can a Directors Loan Account be written off in the companies books?

A company may write off a loan to a director. However, the loan requires a formal waiver. The liability still stands if the company accepts it and ceases further collection. Then deemed dividend and covered by the Income Tax (Trading and other income) Act 2005.

How To Avoid An Overdrawn Directors Loan Account?

Therefore, prevent the appointed insolvency practitioner asking the Director for overdrawn monies to be repaid? Things need to happen, so to avoid this happening, like:

  • If salary / PAYE  not paid due to cash flow, then process payroll and credit the DLA.
  • Dividends may be awarded, only out of profits, and then credited to the DLA for drawdown.
  • Check for expenses the Director may have paid for personally, but then never claimed

Directors Loan Account. – Records You then Must Keep?

Ensure; therefore, you maintain a record of all money you borrow from or pay into your Company. This account needs to be called the Director’s loan account.

At the financial year-end:-

Incorporate money you owe your Company and any the Company owes you. Therefore, ensure this remains recorded on your companies’ balance sheet’ in your annual accounts.

Disclosure of an overdrawn director’s loan account

Having an overdrawn director’s loan account requires the company to disclose the company’s tax return. The company then remains required to pay corporation tax on the balance, remaining nine months after its year-end. Directors of the company owing money to the company should note HMRC may raise the director’s loan account issues as part of a corporation tax compliance check. Therefore, ensure that you include all entries accurately. 

Directors Loan Account and Liquidation & Tax On Loans From The Company?

Provision needs accounting to pay tax on the Director’s loans. Your Company may also be required to pay tax. Applies if you’re a shareholder and director of your Company.

Your tax obligations, both private and business, may then depend on whether the Director’s loan account remains:

  • Overdrawn – you therefore owe the company money.
  • In credit – therefore, the Company then owes you money.

Use form CT600A when you prepare your Company Tax Return to show the amount you owe the Company at the end of your company’s financial year-end.

Reclaim Corporation Tax

Your company may reclaim the Corporation Tax paid on a director’s loan repaid, written off or released. You cannot reclaim any interest paid on the Corporation Tax.

Ensure you claim once any relief is due. This takes place 9 months and 1 day after the Corporation Tax accounting period that the loan repayment, written off or released.

The claim requires securing within 4 years (or 6 years if the loan remains repaid on or before 31 March 2010).

Corporation tax charge – S455

Come to the companies year-end; if a balance remains outstanding on your loan account with your Company, the Company may be liable for a tax charge, referred to as S455.

I am applying to ‘close companies’, a limited company with no more than five shareholders/directors.
The directors’ loan account balance must be summarized on additional pages within the Company’s annual corporation tax return (CT600). The S455 charge 32.5% of the balance outstanding at the period end. S455 tax is then payable nine months and one day after the year-end.

An overdrawn director’s loan account remains effectively an interest-free loan, so S455 deters the Company from providing such generous perks to its directors. However, S455 remains unusual, as it exists temporarily – and repaid to the Company by HM Revenue & Customs (HMRC), as the Director repays the loan to the Company.

S455 tax is due on any advances on the loan, not the total loan balance.
If the loan is repaid to the Company within nine months of the year-end, relief is due immediately, and the S455 tax does not apply. (disclosure in the Company’s annual tax return required).

Directors Loan Account. – Beneficial Loan Benefit in Kind

A further potential liability of having an overdrawn director’s loan treated as a benefit in kind as a beneficial loan. Overdrawn director’s loan account remains an interest-free loan from your Company. Therefore, the loan recipient (Director) remains liable for tax on the interest not charged.

Usually few exceptions exist for a taxable benefit applied to a beneficial loan. They thought maybe the:

  • The loan for ‘qualifying’ uses by the company director;
  • The company charged the Director interest;
  • a loan considered’small’.

If You Lend The Company Money?

Any money you may put into your Company as a loan, remains not liable to the Corporation tax.

What if I charge my company’s interest?

Any interest you, therefore, choose to charge your Company for money lent counts as:

  • A tax allowable business expense;
  • Personal income for you.

Any interest you receive must then be accounted for as income for you, and as such needs to be noted on your self-assessment tax return next time you file it.

Your Company required To:

  • Pay you the interest deducting Income tax at a basic rate of 20%
  • Account for tax on interest via a CT61, and pay the income tax every quarter to the HMRC.

You can request form CT61 online or call HM Revenue and Customs.

HMRC Shipley Accounts Office.
0300 051 8371;
Monday to Thursday, from 9 am to 4.30 pm;
Friday, from 9 am to 4 pm.

Dividends.

Essential to note. Dividends may only payout to shareholders of the Company. If a director, but not a shareholder, then not entitled to dividends.

To Pay Dividends Out.

  • Ensure monthly management accounts show “PROFIT” that can be available for distribution. If the reports show a loss or a small profit during that period, then a dividend may not be paid out unless reserve profit exists in that financial year.
  • Take minutes at the monthly board meeting, approved by directors, and pay a dividend from profit.
  • Have a reserve provision in profit and loss for bad debts. Protects, therefore, taking dividends without profit.

Dividend Paperwork Required.

For a dividend payment, every time you make a payment, you need to write up a dividend voucher detailing the:

  • Date of payment;
  • Company name;
  • Details of shareholders paid a dividend;
  • The amount of the dividend paid;
  • Every shareholder receiving a dividend payment requires a copy of the dividend voucher. The original must be recorded and maintained with the statutory books and records. Always please seek professional help and ask for it to be in writing.

Director Loans Written off?

Your company writes off a director’s loan, tax and accounting entanglements need to be addressed in the event. You should seek help from a suitable accountant for further advice.

So what can happen in summary?

  • The loan must be paid back regardless of your personal financial situation. Failing, which increases the risk of personal bankruptcy and other sanctions.
  • The appointed liquidator will prosecute you in court for the money owed by you to your former company.
  • Penalties against you, together with demands for repaying owed by you to the company, could lead to disqualification as a director for two to fifteen years, should any impropriety be proven.
  • If illegal deed is found, you may be prosecuted and sentenced to prison.any
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