Overdrawn director’s loan account

An overdrawn director’s loan account is created when a director (or other close family members) ‘borrows’ money from their company. Many companies, particularly ‘close’ private companies, pay for personal expenses of directors using company funds. Where these payments do not form part of a director’s remuneration they are usually posted to the director’s loan account (DLA).

The DLA can represent cash drawn by a director and payment of other personal bills and expenses. 

Whilst it is quite common for small company accounts to show an overdrawn position on a DLA, this can create some unwelcome consequences for both the company and the director. The rules are further complicated if the loan is for more than £10,000.

Where certain DLA’s are not paid off within nine months and one day of the company’s year-end there is an additional Corporation Tax (CT) bill of 32.5% of the outstanding amount (prior to April 2016 this rate was 25%). In most cases this is not a permanent loss of revenue for the company as a claim can be made to have this CT refunded (but not interest) when the loan is paid back to the company, as long as this is within 4 years of the loan being taken out.

Planning note

Another unwelcome tax consequence is the levy of a personal benefit in kind tax charge if the company does not charge an approved rate of interest for the use of company funds. Consequently, an overdrawn loan account should not be considered without due attention to the CT, Income Tax and National Insurance consequences. There are planning options that will soften the impact of these charges. Please call if you would like our advice. 

 

Posted in HMRC notices

Exeter Accountant MJ Smith & Co

Celebrating 25 years of excellence.

Free 1st Meeting
Fixed Fees
Free Support!

Find out more

Latest News

Can we claim for marketing, entertainment and subscription costs?

The self-employed are often concerned if an expense is allowable or not for tax purposes. In this article, we will …
Read More

Basic monthly tasks if you run your own payroll

One of the most time-consuming admin tasks associated with the running a small business can be dealing with the payroll.Generally …
Read More

The end of credit card payment surcharges?

From 13 January 2018, it will become illegal for any business to charge a fee in addition to the advertised …
Read More

Twitter Feed