Directors 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.
RECTORS LOAN ACCOUNT
A Directors Loan Account (DLA) 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 applies when they put money into the business, to keep it afloat, for cash flow purposes.
A Director’s loan account, is usually a Creditor, i.e. money owed to the Director by the company, but when it is overdrawn a whole new scenario evolves.
OVERDRAWN DIRECTORS LOAN ACCOUNT
An Overdrawn Directors Loan account at year-end can 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 it is not a problem.
Generally, if the loan account is over £10,000, it will be classed as a benefit in kind and declared on the P11D, it will also be liable to NIC.
In the event of a liquidation of the company, and Overdrawn Director’s loan account becomes an asset that can be recovered by the insolvency practitioner.
HOW TO AVOID AN OVERDRAWN DIRECTORS LOAN ACCOUNT
To prevent the appointed insolvency practitioner asking the Director for overdrawn monies, be repaid, there are things to be considered to avoid this happening, such as:
- If salary / PAYE has not paid because of cash flow, then still process payroll and credit the DLA.
- Dividends may be awarded, only out of profits, and credited to the DLA for draw down.
- Check for expenses that the Director may have paid for personally but never claimed
RECORDS YOU MUST KEEP
Ensure 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 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. Your company may also be 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 depend on whether the Director’s loan account is:
overdrawn – That is you owe the company money.
In credit – the company 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 companies financial year-end.
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 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).
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 though may be:
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 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 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, 9 am to 4.30 pm
Friday 9 am to 4 pm
It is essential to note. Dividends may only payout to shareholders of the company. If you are a director but not a shareholder, then you are 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 are required 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, and 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.