Directors Loan Account.
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, especially small businesses, have a lot of transactions in the Director’s loan accounts. For example, a Director pays an invoice themselves. Therefore will show as a credit in the DLA. The same, therefore, applies when they put money into the business, to keep it afloat, for cash flow purposes.
A Director’s loan account, is therefore then usually a Creditor, i.e. money owed to the Director by the Company, but when it is overdrawn therefore a whole new scenario evolves.
Who can have a Director’s loan?
To have a directors loan account. You remain required to be a director of the company to establish a loan.
Why have a Director’s loan?
To create a directors loan may be that you have a need personally and it needs processing fast.
Remember though, the loan as yet has no personal or company tax assigned, and the HMRC will require that to be done before the year-end.
An Overdrawn Directors Loan Account.
An Overdrawn Directors Loan account at year-end can then be seen 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 is over £10,000, then classed as a benefit in kind and declared on the P11D.
In the event of a liquidation of the Company, and Overdrawn Director’s loan account becomes an asset that can then be recovered by the insolvency practitioner.
How To Avoid An Overdrawn Directors Loan Account?
To, therefore, prevent the appointed insolvency practitioner asking the Director for overdrawn monies, be repaid. There are things to consider to avoid this happening, such as:
- If salary / PAYE has not been paid because of 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 that 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 Director’s loan account.
At the financial year-end:-
Incorporate money you owe your Company and any the Company owes you, ensuring this is then recorded on your companies’ balance sheet’ in your annual accounts.
Tax On Loans From The Company?
Provision needs accounting for to pay tax on the Director’s loans then. Your Company may also be then required to pay tax. Applies if you’re a shareholder as well as a director of your Company.
Your tax obligations, both private and business, may then depend on whether the Director’s loan account is:
Overdrawn – That is, you then owe the company money.
In credit – therefore, the Company owes you money.
Use form CT600A when you prepare your Company Tax Return to therefore show the amount you owe the Company at the end of your companies financial year-end.
Reclaim Corporation Tax
Your company may reclaim the Corporation Tax paid on a director’s loan that’s been 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 end of the Corporation Tax accounting period that the loan was repaid, written off or released.
Claim are required within 4 years (or 6 years if the loan was 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, then the Company may be liable for a tax charge, referred to as S455.
I am applying to ‘close companies’ being a limited company with no more five shareholders/directors.
The directors’ loan account balance, is required to be summarized on additional pages within the Company’s annual corporation tax return (CT600). The S455 charge is 32.5% of the balance outstanding at the period end. The S455 tax then is payable nine months and one day after the year-end.
An overdrawn director’s loan account is effectively an interest-free loan, so S455 is then supposed to deter the Company from providing such generous perks to its directors. However, S455 is somewhat unusual in that it is temporary – it is repaid to the Company by HM Revenue & Customs (HMRC), as the Director repays the loan to the Company.
S455 tax due on any advances on the loan; not the total loan balance.
If the loan 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 is required).
Directors Loan Account. – Beneficial Loan Benefit in Kind
A further potential liability of having an overdrawn director’s loan is treated as a benefit in kind as a beneficial loan. An overdrawn director’s loan account is an interest-free loan from your Company. Therefore, the recipient of the loan (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 loan is for ‘qualifying’ uses by the company director.
The Company charged the Director interest.
The loan is considered ‘small’.
If You Lend The Company Money?
Any money you may put into your Company as a loan is then not liable to Corporation tax.
What If I Charge My Company Interest?
Any Interest you 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.
It is 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 during that period the reports show a loss or a small profit, 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, the payment of 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 payment made;
- 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.
Directors Loans Written off?
In the event, your company writes off a director’s loan, tax and accounting entanglements need to be addressed. You should seek help from a suitable accountant for further advice.