Updated for 2016/17

So despite your best efforts to stay on top of your directors’ loan account – you find yourself overdrawn at year end.

Does it matter? Unfortunately yes.

If you have an overdrawn directors loan account then you may find that you are required to pay tax and National insurance on the overdrawn balance. The overdrawn balance has arisen because you have taken more money than you are entitled to out of your business – effectively you have taken an interest-free loan or a form of income on which you not paying tax.

HMRC and Company loans

HMRC has always disliked director shareholders using their companies as a personal moneybox, which they dip into when they temporarily need a little extra cash. It uses two tax charges to discourage this; one for the director and the other for the company. These days the former is modest and so not much of a disincentive. The latter is more punitive.

We will use an example to highlight the potential tax liabilities.  Company Bob Ltd has a year end of 31 March 2017 and Bob, the sole director/shareholder has an overdrawn Director’s Loan Account of £15,000 relating to a cash advance taken on the 1st October 2016.

S455 Corporation Tax

An overdrawn Director’s Loan Account at the end of the financial year should be repaid within 9 months and 1 day after the financial year end to avoid any additional tax charges.

If the loan is not repaid in that time, the company will have to pay 32.5% (25% prior to 5th April 2016) of the balance outstanding along with the Corporation Tax charge for that year.

In this example A Ltd will owe £15,000 x 25% = £4,875 in S455 Corporation Tax

When the loan is repaid in full or in part the S455 tax is fully or proportionally repayable 9 months and one day after the end of the accounting period in which the repayment is made.

P11D and Benefits in Kind

If the overdrawn director’s loan account is in excess of £10,000 (£5,000 up to 5th April 2014) at any point during the tax year it is treated an employment-related loan. Remember, a company is a separate legal entity and the director is regarded as an employee of the company for tax purposes. A taxable benefit in kind arises where the employee does not pay the company interest at the HMRC official rate of interest a ‘cash equivalent’ benefit has been received.

https://www.gov.uk/government/publications/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates/beneficial-loan-arrangements-hmrc-official-rates

In this example, the official rate for 2014-2015 is 3.25%. The ‘cash equivalent’ of the loan is £15,000 x 3.0% x 6/12 months = £225.00.

This needs to be reported on form P11D for the year end 31-March 2017 and on Bob’s personal tax return.

Director’s Personal Tax Return

Where a director owes a company more than £10,000, this sum must be declared on his or her Self-Assessment tax return. Using our example above – the £225.00 benefit in kind calculated above becomes part of Bob’s taxable income.

Directors may also charge interest on any sum of money owed to them – this is an allowable business expense in the company accounts and for corporation tax but becomes taxable income in the directors self Assessment tax return.

What must be reported in the director’s personal tax return:

  • The director owes the company more than £10,000 at any time during the year.
  • The director pays the company interest on a loan below the official rate of interest.
  • The director is not required to repay the loan because it is ‘written off’ or ‘released’ by the company.
  • The director charges the company interest on a loan, which is classed as a form of personal income.

Reporting Overdrawn DLA’s

Even if you are the only shareholder and director of a company, the annual accounts must show the value of any loans outstanding to the directors and their immediate families and the maximum balance during the year. the disclosure is required to show other people and stakeholders who may be owed money by the company, how their cash is being used.

  • A bank manager, for example, will be able to see that the funds he lent to a company have been provided to the directors for their own personal use and he may not be very happy. The bank may have the power under its loan agreement to demand an immediate repayment, possibly from the directors under a personal guarantee.
  • If there is an outstanding amount owed to HMRC, for example, they may consider that the directors have drawn funds for personal use that should have been used to repay HMRC liabilities. HMRC may take action against the directors if those funds are not repaid.

If you are worried about your overdrawn directors loan account please give us a call on 01449 258548.

 

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