Directors loan accounts
If you operate your business as a sole trader, Directors loan account isn’t something you need to worry about. If you are a limited company director and shareholder then a directors loan account can be a bit of a headache. That’s because a limited company is a separate legal entity. This means you can lend it money and borrow from it, albeit HMRC would prefer you don’t borrow. The following government link gives more details. Below is a summary of the main points
What is a directors loan account?
- If you lend money to the company
- Any money was taken from the company that is not a dividend, salary or expense payment
If you have lent money to the company you can withdraw the entire amount without any tax implications. If you owe the company money there may be tax implications for both the director and the company
Overdrawn directors loan account
An overdrawn director’s loan account is effectively an interest free loan made to directors. The company must show all overdrawn accounts in its accounts and tax return.
Your company and personal responsibilities are as follows:
- The company must complete form CT600A stating the amount of the loan. If the loan was more than £5,000 and you took another loan of £5,000 or more up to 30 days before or after you repaid it. The company must pay 25% of the original loan amount as corporation tax. If the loan is repaid in full within 9 months after the year end the 25% is not payable, disclosure is still required. There are no personal liabilities to tax.
- The loan is repaid after 9 months of the year end. Disclosure on CT600A is required. 25% is payable as corporation tax. Interest is charged on the 25% up until the loan is repaid or the 25% corporation tax is paid. Once the loan is repaid the 25% corporation tax is repaid but not the interest. There are no personal liabilities to tax.
- The director’s loan account is not repaid and effectively written off. The company via its payroll must deduct class 1 national insurance. Income tax is payable via your self-assessment on the amount of the loan.
- You owe more than £10,000 at any point in the year, your company must treat the loan as a benefit in kind. As well as deduct class 1 national insurance.
- You paid interest on the loan at less than the official rate. The company must show as income the difference of the rate you pay and the official rate. The difference in interest payment must also be treated as a benefit in kind. The interest difference must also be reported in your self-assessment.
Keeping track of directors loan accounts
Overall, the key is to keep timely, accurate records and to keep the transactions relating to each of the directors separate. Poor record keeping could result in misallocation of expenses/payments. As well the incorrect amount of tax being paid. The company must disclose the amount of all director’s loan account, with the largest balance being stated. Ensuring that a balance that starts below and above £10,000 are stated.
Proper record keeping ensures that interested parties and lenders can see how responsible company directors are being. We advise all our clients to use a cloud based accounting system with a number of add-ons that allow you to keep an electronic copy of paperwork relating to transactions.
The best way to deal with a director’s loan account will depend on the numbers. In this case the tax and cash flow implication to the company and individual director. Contact us to see how we can mitigate your tax and improve your cash flow.