Director's Loan Accounts

Director's Loan Accounts are either in credit or overdrawn. If the director has loaned the company money or spent money on the company's behalf, then the account is in credit.

If however the director has taken money from the company, and not by means of a dividend, salary or expense claim then the account is overdrawn: money has been removed from the limited company without any tax being paid. Often of course it is a mixture of the two and it is the net balance which defines the status.

If a director's loan account is overdrawn at year end this can have the consequences of an S455 charge of additional corporation tax charge as well as benefit in kind implications if the loan is over £10,000 and the director is not being charged interest at a rate set by HMRC (the official rate of interest). Firstly, let's deal with the S455 charge. This is worked out at year end when the final accounts are submitted but is not paid at that time. If the loan remains unpaid 9 months and 1 day after year end it is, otherwise it is reclaimed and no tax is paid on the loan. One thing a director cannot do is "bed and breakfast" by repaying a loan only to take out a fresh loan within 30 days. HMRC takes a dim view of this and acts as if the loan had not been repaid for tax purposes. If the loan is over £10,000 AND the director has not been charged interest at or above the official rate of interest then a benefit in kind arises and that must be reported in the director's self assessment form and a charge will arise. The director will also have to pay National Insurance (NI) via a benefits in kind payroll form called a P11D. One way around this is to charge the director interest at the official rate in the company accounts as company income.

So how do we clear overdrawn director's loan account balances?  Well, issuing a dividend from post-tax profits is the most common way. An accountant will also reclaim all expenses and allowances due to the director such as general expenses, mileage and a working from home charge. Also a bonus could be issued at year end although this would have Pay-As-You-Earn (PAYE) & NI implications via payroll reporting. If a company decides to write off an overdrawn director's loan account, it must pay NI via its payroll and the director must pay income tax on the full amount in their self assessment.

If the director's loan account is in credit, things are less complex. The company must pay the director taxed interest and report this on form CT61. The director must report the income on his/her self assessment form.

That's it for this week! As many directors and companies reinvest their monies in property, next week we will outline the rules and regulations when it comes to property investment and taxation.