A director’s loan account (DLA) or a director’s current account, is an account in the balance sheet that summarises the transactions between a company director and the company.
Simply:
- An asset is created where the company loans money to the director to be repaid at a later date i.e. the director owes the company money
- A liability is created where the director lends money to the company to be repaid at a later date i.e. the company owes the director money
How it arises
The DLA is a combination of money owed to and money owed from the director.
For example:
- the director may loan the company £1000 to cover working capital requirements
- they may pay for personal expenses through the company bank account
Each of these would be included in the DLA. The directors’ loan account builds up an amount owing to/from the director that he may claim as and when he needs to.
The Problem – Overdrawn Director’s Loan Accounts and Tax
Directors’ loan accounts can become overdrawn if not checked regularly and managed carefully. By this, we mean that it is very easy for a director to draw more than he is entitled to resulting in an overdrawn DLA.
This can have serious tax implications at the end of the year – if you have taken more than you should HMRC will consider that you have received the benefit of an interest-free director’s loan.
If the overdrawn loan is not repaid within nine months of the end of your corporation tax period, the company will be charged an additional 32.5% in S455 Corporation Tax on the balance of the outstanding loan.
There could also be a PAYE/P11D issue if interest is not charged by the company on the overdrawn balance.
The Solution
The good news is that directors’ loan accounts can be repaid in a number of ways and therefore avoid all or some of the S455 Corporation tax. Careful planning can also help prevent the overdrawn DLA arising.
As always, accurate and timely bookkeeping is important to let you know what your balance is.
If you want to learn more about:
- preventing an overdrawn director’s loan account;
- how we can help reduce the company’s potential S455 liability;
- improving your accounting records
Please contact Alison Irwin.
The above article is for general guidance and informational purposes only and is not intended to constitute legal or professional advice. It should not be taken as specific advice for your own circumstances and relied upon. You are advised to take professional advice before taking any action in relation to the above matters.
