Firstly, what are director’s loan accounts?
The Director’s Loan Account records the non-dividend transactions that occur between a company and its director(s). At the end of the company’s financial year, the director would either be owed money or they will owe the company money.
This account contains any cash withdrawals made by director as well as any personal expenses paid using company’s money/credit card, where personal expenses are any expenses that do not satisfy the ‘wholly, exclusively and necessarily in the performance of the duties of the employment’ test.
When do I have to pay tax on the director’s loan account?
If at the company’s year end, the director’s loan account is overdrawn, you may need to pay tax. However, if the entire amount is repaid within nine months and one day, no tax will be owed.
For example, if the director’s loan account is overdrawn fora company with year end 31 May 2019, the loan needs to be repaid back by 01 March 2020 to not attract tax implications.
An overdrawn director’s loan account would mean that the company would have to pay an additional 32.5% on the amount outstanding. When the loan is repaid to the company by the director, HMRC repays the tax to the company. If you want to outsource handling this work, this is part of our standard accounting service.
Is there a time-limit for claims?
Yes. You must claim within 4 years. Don’t forget!
What happens if I owe money to my company?
If you are both shareholder and director and the loan was more than £10,000 at any time during the year, the company must treat this loan as benefit in kind and deduct Class 1A National Insurance at 13.8% on the whole amount.
The loan also will need to be reported on the personal Self-Assessment tax return.
Bed and breakfasting rules
There have been anti-avoidance rules set by the government to prevent directors to manipulate the director’s loan account and to therefore avoid tax.
This consists of directors repaying the loan before the year end or within the following 9 months to avoid penalties (32.5% corporation tax charge) and then immediately taking out a similar amount from the company shortly after. These rules kick in if a director takes a loan from the business within 30 days of repaying a loan in excess of £10,000. The nature of the loan repayment is also be taken into consideration under the ‘motive test’ which is there to prevent simply repaying the loan using an external loan, e.g. borrowing funds for say 31 days (from a source other than your company) to temporarily clear the loan account.
What if the company owes me money?
No corporation tax will be owed by the company on any money it is loaned from the director and you can withdraw this amount at any time tax free.
Any interest that you might decide to charge would be treated as a business expense for the company and personal income for yourself (this would need to be declared on your Self-Assessment).
HMRC’s own guidance can be found here. Note the thresholds were slightly different in 2013/14 so if you have an old loan account, it is well worth having a thorough read of this and HMRC’s guidance.
If you need any help with you Limited company’s Director Loan Accounts, or filing your annual return, then get in touch.