A director’s loan account shows the net position between the company and the director, reflecting loans to and from directors, terms and the amount involved. If your company has directors’ loan accounts, it’s important to understand the implications and to remain tax compliant.
Setting Up A Director’s Loan
Directors often use their loan account to fix their personal short term cashflow issues. Loan accounts also record any loans made from directors to their company. In both cases this can be a low cost, quick fix finance solution. All directors’ loans require shareholder approval.
If income received by a director from the company is not classed as salary, dividend or a business-related expense, it will be classed as a director’s loan and added to their account. It is important to note that funds owed to the company by a director are classed as an asset. (This is also the case if the company is liquidated prior to the repayment of a director’s loan.)
Repaying A Director’s Loan
Directors’ loans must be repaid within nine months and one day of the company’s year-end. Repayment methods are:
Dividend payment – the proposed dividend is transferred to the director’s loan account, thereby negating the deficit. To pay a dividend, a company must have distributable reserves.- Salary payment – this process involves crediting the director’s loan account rather than paying the salary to the director.
- Expenses claim – if a director spent their own money of company business, such as travel expenses, this can be reclaimed as expenses.
- Reimbursement from personal funds – a director with an overdrawn director’s loan account can make a payment from personal funds to offset the deficit.
Alternatively, the debit on a director’s loan account may be treated as a benefit in kind if the following conditions are met:
- the loan deficit is at least £10,000;
- no interest is being paid on the loan; or
- interest falls below the HMRC average official rates.
If the above conditions were met, the director would need to record the loan on a P11D form and as part of their self assessment tax return.
In theory, company directors can agree to write off a director’s loan account, although this must be recorded in writing.
When Director’s Loan Accounts Are Not Repaid
Any director’s loan account deficit should be repaid within nine months and one day after the company year-end. If this deadline is not met, HMRC applies a section 455 tax charge.
The s455 charge (named after the section of the Corporation Tax Act 2010 which imposes the charge) is 33.75% of the amount of the loan. The rate of section 455 tax is the same as the higher dividend rate. There is also an interest charge of 2.25% to pay. The tax is paid with, but is not the same as, the company’s corporation tax for the period.
There are some exemptions when the s455 will not be applied. These are:
- Where a married couple are directors of the same company, offering potential to offset director’s loan accounts.
- Money lending is within the company’s ordinary course of business
- Money was paid for goods and services to be incurred by the company
- If the director or employee in question is full time and has no material interest in the company, loans up to £15,000 are exempt from s455 charges.
“Director’s loan accounts are more complex than they seem initially,” says Emily Bridges of re:accounts in Stevenage. “The strict repayment deadline may prove costly for the company or individual director plus there are other repercussions to think through.”
Do you have, or are you considering, a director’s loan account?
Make sure you’re fully informed before taking action. Talk to the friendly experts at re:accounts. Let’s a have a coffee and a chat.
