What is a director's loan accounts?
The Director’s Loan Account (DLA) is the account which shows how much money has been taken from the business (before dividends) or how much you have spent on the business using your own funds. At the end of the financial year your Directors loan account will either owe you money or you owe the company money.
This account should reflect any non-dividend cash withdrawals made by the director and the personal expenses paid using businesses money/credit card. On the other hand, any money you have put into the business from your personal account should be reflected as well.
Directors loan accounts can become a bit of a mess and can come under scrutiny from HMRC and shareholders. Having a Directors Loan Account is only a problem when you are overdrawn and you cannot afford to repay it.
Do I need to pay tax on the director’s loan account?
If at the company’s year end, the director’s loan account is overdrawn by more than £10,000, you will need to pay tax on this amount unless it is repaid within 9 months and 1 day of the company’s year-end.
For example, if the director’s loan account is overdrawn by £10,000 by year end 30 June 2020, the director’s loan needs to be repaid by 01 April 2021 to avoid tax.
If this has not been done, the overdrawn director’s loan account would mean that the business would have to pay 32.5% on top of the amount outstanding. When the loan is repaid to the company by the director, HMRC repays the tax to the company. You need to claim this back within 4 years.
What if I owe the business money?
If you are shareholder/director and the loan was more than £10,000 at any point in the year, this will be treated as a benefit in kind (BIK) and would attract a Class 1A National Insurance at 13.8% on the whole amount.
This will then be reported on your self-assessment
What are Bed and breakfasting rules?
HMRC have added new tax avoidance rules to prevent directors from manipulating the director’s loan account and therefore avoid tax.
What are these rules? If a director(s) repays the loan before the year end or within the following 9 months to avoid the charge of 32.5% and then immediately taking out a similar amount from the company shortly after then the following rules apply. If you do this, you will have to prove this is real through the motive test. Therefore, if this happens, it needs to be a real transaction rather than a clever way of avoiding tax in perpetuity.
What if the business owes me money?
The company may owe you money if you have pumped in money into the business at the start of its life or the business has cashflow issues and needs to be shored up. There is no corporation tax on money owed to you by the business and any withdrawals from the business to your own account is not taxed.
If you charge interest on the company loan, you will need to report the interest in your self-assessment.