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Overdrawn Directors Loan Account

What is an Overdrawn Directors Loan Account?

An overdrawn directors credit account is an asset of a limited company until the loan is repaid failing which the liquidator will request repayment in liquidation.

The director’s loan account shows transactions between the company and the directors of the time.

Let’s say the director uses his credit card or his own money to cover business costs. The company then owes money to the director. However, the amount credited to the director’s credit account will appear as a creditor until it is returned to the director. (That is, the company owes the director). Suppose the director uses money or a credit or debit card from the company. Then every payment is debited to his credit account, and he will be a debtor of the company until the credits appear to reduce or even repay the balance. (Here, the director owes money to the company)

The loan account reflects these transactions and accurately reflects the position of the account, so at a given time. (Like a bank statement).

However, once a limited company experiences financial difficulties and enters insolvency, matters for directors can then turn awkward, exposing them to

Potential personal liability. For further reading, please view ‘what is insolvency?

Important points to remember about Director’s Loans

  • You may only vote yourself a dividend if a shareholder;
  • Understand where you show the amount owed;
  • Declaring it on your company’s tax return on the company’s year-end;
  • If your company operates at a loss, you must not draw down any dividends;
  • Do take drawn down any dividends if your company is insolvent and still trades;
  • If your directors account is overdrawn with the company, it is necessary to deal with it, as it will not disappear;
  • Ensure you repay your loan within nine months, or face interest and additional income tax:
  • Once repaid, ensure you show it in the company’s records.
IMMEDIATE HELP FOR DIRECTORS LOANS IS AVAILABLE TODAY!

Overdrawn Director’s Loan Accounts. When do they occur?

Commonly, overdrawn director’s loan account arises from company directors seeking advice from the Accountant when wishing to save tax.

The account commences however, once directors cease to take a full salary from their business and take a dividend instead. Therefore, they usually take a salary of £12,000 through the PAYE scheme and the top-up in dividends. The latter attracts a lower tax rate than through PAYE.

It is essential to understand how dividends remain paid, and importantly to whom.

Dividends derive from distributable reserves within the business. But if the company runs out of money and the director still takes money out of the business, they eventually become overdrawn, as with a bank account.

A simple equation that is controversial with business directors when the company fails and takes some form of liquidation.

Note: If the company doesn’t have any cash, it can’t pay dividends. Therefore, should your limited company’s balance sheet start with nil or negative reserves, and the business produces no profits or even a loss, then no dividends are payable. Accordingly, directors must cease drawing money until the company enters into profit, rebuilding reserves to draw a dividend. 

Directors shouldn’t draw drawings if they can’t draw dividends. However, if you take out a loan, you must repay it. 

In detail then:

However, if the director loans the company money, it can be offset against the director’s account, either by reducing or paying off the amount owed, leaving the company owing money to the director, who now assumes the position of a creditor. Transactions of this type must transact through the company’s bank account for accounting purposes.

Company directors can borrow money from a limited company. But the company must be solvent for the foreseeable future. Transactions like that are governed by the Companies Act 2006, and as detailed in the company’s articles of association. 

To draw down loans up to £50,000, directors must therefore first obtain shareholder approval.

Going Overdrawn

Directors’ credit accounts attract scrutiny from a few people, including the individual and the company itself, for taxation.

It’s important to remember that taking loans from a limited company isn’t like when you’re trading as a sole trader or partnership

A limited company is a separate entity.

Once a director’s account is overdrawn, the director is responsible for repaying the company.

If the company goes bust and it’s overdrawn, the liquidator will ask for the money back.

How long do I have to repay a Director’s Loan?

Director’s loans should be returned within nine months of the end of the company’s financial year, so that they remain not considered “overdrawn.”

Records You’re Required To Maintain

Directors should keep accounts up to date. Likewise, directors should keep track of the money they borrow from your company or pay into the company. This account is called the “director’s loan account.”

What if my Director’s Loan is below £10,000? – Tax Implications

HMRC can consider a directors loan a benefit in kind, attracting a tax liability for the borrower.

However, an exception applies for a small loan, i.e. less than £10,000. For a loan from the company to exceed £10,000, it requires the approval of the company’s shareholders.

Paying Dividends While the Company is Insolvent

Paying yourself a dividend from your company while insolvent means the payments remain ultra virus once the company liquidates. i.e. you had no authority to make such payments.

Mistakingly referred to as ‘illegal dividends’, directors may be entered into the accounts as borrowed money from the company, and it becomes an asset of the limited company.

Disclosure 

Having an overdrawn loan account of a director means revealing the overdrawn amount in your company’s tax return. However, your company remains liable for any tax on monies not repaid before nine months after the end of your accounting year-end for corporation tax. This will then mean the company will pay 25% corporation tax on the amount unpaid.

Directors often ignore managing their loan accounts. However, directors must ensure they include all entries correctly in the companies records.

HMRC can inspect directors about their loan accounts. They carry out such tasks based on Corporation Tax compliance inspections at any time.

Tax Avoidance

Effective March 20th 2013, HMRC introduced several adjustments to section S455 tax charge to help prevent close company loans to avoid tax payment.

Your personal and business tax depends on whether the account of a director remains:

Ensure you understand the tax implications.

Interest Rates on Overdrawn Director’s Loans?

As soon as the accounting period finishes, you must repay any directors loan within nine months of the year-end—failing. The company will incur additional tax for the limited company of 32.5%.

However, it only applies to outstanding loans after April 6th, 2016

Average official rates per HMRC

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Use the table below to find the average official rate of interest for years when:

  • The loan was outstanding throughout the Income Tax year;
  • You are using the normal averaging method of calculation.

Table of average official rates per HMRC

YearAverage official rate %
2018 to 20192.50
2017 to 2018.2.50
2016 to 2017.3.00
2015 to 2016.3.00
2014 to 2015.3.25
2010 to 2014.4.00
2009 to 2010.4.75
2008 to 2009.6.10
2007 to 2008.6.25
2002 to 2007.5.00
2001 to 2002.5.94
2000 to 2001.6.25
1999 to 2000.6.25
1998 to 1999.7.16
1997 to 1998.7.08
1996 to 1997.6.93
1995 to 1996.7.79

Directors Loan Accounts (OVERDRAWN) and in Liquidation.

Overdrawn directors loan account refers to when a director owes money to the company (a company debtor). The liquidator will collect any overdrawn director loan account, as considered a debt owed to the company in liquidation.

Accountants advise directors, especially shareholders, that the most tax-efficient way to pay themselves is by paying enough through the company payroll to cover National Insurance Contributions, then the balance as drawings. (This, though, requires profit to pay drawing on account of year-end dividends)

Company directors drawings exist when directors take money from the company, not through the payroll, leading to the balance on the directors’ “credit account being overdrawn. i.e. the director owes money back to the company.

At the year-end, the accountant acting for the company finalises the available profit and declares an annual dividend. Dividends require credit to the overdrawn directors’ loan account, which hopefully, along with other potential credits, clears the overdrawn balance and may show the director as a creditor of the company.

If, though, the company has earned an insufficient profit to clear the directors’ account. Then the account is overdrawn, and they owe the company money, presenting a problem once a liquidator is appointed. As often, directors have either forgotten or are unable to repay the company.

Overdrawn directors loan account and Liquidators Duty To Collect

The liquidator has little or no movement in overdrawn directors’ “credit accounts (but is then blamed for collecting them). The liquidator collects all debts owed to the company as part of their duty. Their accountants must advise directors to monitor the situation monthly. If profits fall, tax savings will no longer be a priority. If this is the case, the company’s payroll will reward the director if no profit exists.

If a company enters liquidation and a balance show owing on the overdrawn directors’ loan account. The loan account is part of the company’s assets. Then, the liquidator has a statutory duty to realise it.

Insolvency Practitioners attempt to treat directors’ accounts overdrawn reasonably. Perhaps the report has not been updated with what the director may have paid out on behalf of the company, but not accounted for it through a legitimate expense voucher.

Liquidator remains committed and ensures a financial reconciliation of the money in and out of the company’s bank account, and an account for transactions in the directors’ “credit account. liquidators ask directors for receipts and evidence to support any claim that the directors may make.

If correct and verified, these amounts can be deducted from the directors’ loan account, reducing the balance owed.

Any balance remaining requires an agreement with the liquidator to repay the loan account.

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