What are director’s loan accounts?
Essentially, HMRC defines a director’s loan as money taken from your company that isn’t either:
- A salary, dividend or expense repayment
- Money loaned to the company and you is being paid back
If you take money out of your small business for any other reason, the amount must be recorded in your personal directors loan account (DLA). At the end of your company’s financial year, depending on your activity, you’ll either owe the company money or the company will owe you money. This should be recorded as an asset or a liability in the balance sheet of your company’s accounts.
What should a director’s loan account contain?
Your director’s loan account needs to be evidenced by your personal finances, as well as your company’s, to ensure it’ll stand up to scrutiny by HMRC.
Items you should record in your DLA are:
- Any cash withdrawals from the small business that you’ve made as a director
- Personal expenses which were paid with company money or credit card, accidentally or on purpose
- Business expenses are any expenses that are incurred wholly, exclusively and necessarily in the performance of the duties of the employment. Anything that fails this test is, therefore, a personal expense.
Who can take a director’s loan?
Only a director of the company can take a directors loan – each account needs to be separate for each director.
Why would you want to take a loan?
There are many reasons why you might need to take a loan from your company, for example covering a sudden expenditure like a boiler or car break down.
The important thing to remember is that the loan hasn’t been subject to any tax and HMRC is going to be very interested.
When will I have to pay tax on a director’s loan account?
If you own your small business money at the year end of your company, you may need to pay tax. If you pay back the entire director’s loan within nine months and one day after year end, you won’t owe any tax. In other words, if your director loan account is overdrawn at your company year end of 30th March 2020, the loan must be paid back by 1st January 2021.
Any overdue payment of a director’s loan means your company will pay additional Corporation Tax at 32.5% on the amount outstanding. This extra 32.5% is repayable to the company by HMRC when the loan is repaid to the company by the director. There could be personal tax to pay at 32.5% of the loan amount if you do not repay your DLA. This is not repaid by HMRC when the loan is repaid.
Do I need to record director’s loans?
Yes. you need to understand you are legally separate to the company . Your small business has its own legal status and obligations.
What happens if I owe my company money?
If you owe your small business more than £10,000 (interest-free) at any given time, the loan is classed as a benefit in kind and you’ll need to record it on a P11D, as it’ll be liable to both personal and company tax. Your company will also need to pay Class 1A National Insurance at the 13.8% rate on the full amount.
If the company owes you money
Your company doesn’t pay any Corporation Tax on money you personally lend it and you can withdraw the full amount from the company at any time.
If you charge any interest, this will be classed as a business expense for your company and personal income for you. The interest amount must be declared as income on your Self Assessment.
‘Bed & Breakfasting’
The government introduced measures to stop directors using their directors loan account to reduce tax.
This is a method used by some directors to evade tax by repaying their borrowed money to a company before the year-end to avoid penalties, only to take another loan out with real intention of paying the loan back.
When a loan in excess of £10,000 is repaid by the director, no further loan over this amount can be withdrawn within 30 days. When this happens, the government’s view is that the director doesn’t intend to pay the money back and the full amount will automatically be taxed.
The ‘bed and breakfasting’ of a loan which falls outside of the 30-day rule, may still be subject to tax where the loan is in excess of £15,000. The rules state that where a loan of over £15,000 has been made to a director of the company, and before any repayment is made there is an intention to take a future loan of more than £5,000 which is not matched to another repayment, then the bed and breakfast rules apply.
So, if you make a repayment towards your director’s loan of more than £15,000 within 30 days, and intend to take a new loan of over £5,000 in the future, the ‘bed and breakfasting’ rules apply.
HMRC will see the pattern of your DLA and make a decision.
If you are doing anything similar then you need to talk to an accountant.
Written off loans
If your company writes off a director’s loan, there are tax and accounting implications. This is when you need to consult an accountant.
Do HMRC monitor director’s loans?
Indeed they do – and they’ll monitor directors loan account which are regularly overdrawn. Be aware that they may decide that the money is not a loan but a salary, and subsequently charge Income Tax and National Insurance on the sum.
We suggest that you monitor your director’s withdrawals to ensure you don’t exceed the £10,000 threshold.
Our advice comes from our team of expert accountants but it’s always best to get specialist help from your accountant when dealing with things like director’s loans, just so your safe in the knowledge HMRC are not going to come knocking. With Your Ecommerce Accountant we can help you whenever you need it.