Director's Loan Accounts
How They Work
Tax Implications of an Overdrawn DLA
It is often assumed that a Director can take money from a company and not pay tax on it, but if this creates an overdrawn director’s loan account, HMRC will certainly be on your case.
This remains the case, even if the company is insolvent, heading towards liquidation or been served with a winding-up petition, any untaxed income is likely to be scrutinised and subject to tax.
HMRC is unlikely to view your director’s loan as personal income as it is actually a company asset and owed back to the business. HMRC have a set of rules that apply to Directors in these circumstances.
Some things therefore to consider, should you have a Directors loan which is overdrawn;
- If your director’s loan account remains overdrawn 9 months after the end of your company’s accounting period (year-end), the company will be subject to a charge known as Section 455 (S455).
- This is charged to the company at a rate of up to 32.5% of the overdrawn amount not repaid within 9 months of the year end.
The above is irrespective of corporation tax; it makes absolutely no difference whether your business has made profits or losses or whether or not you have paid tax – the S455 tax charge on the overdrawn DLA is still payable. It will have to be paid, just like corporation tax, 9 months after the end of your company’s accounting period.
Once the DLA is repaid, the tax payment may be refundable. However, recovering this tax payment can be a long process with HMRC.
Possible Problems for a Director with an Overdrawn DLA in Insolvency
If a company is insolvent and a director has been withdrawing company funds, this can cause an issue.
Sometimes a company will try to reduce the DLA by voting the balance as a dividend or bonus to clear the DLA. But if the company then goes into liquidation, this could be setting the director up with a potential problem.
It is important to remember that a dividend can only be paid out of company profits, if there is not any profit in the company, a dividend cannot be issued.
If an insolvency practitioner is subsequently appointed they will analyse recent company affairs and investigate money trails. If an investigation concludes that creditors are missing out on payments they are owed, but a director has taken a dividend or bonus to clear an overdrawn director’s loan, this could land the director with a problem and raise legitimate claims against the director which may include preferential treatment for example
The director would need to prove that any dividend/bonus was in the best interests of the company and its creditors but, considering the company’s position and that it owes money that it now doesn’t seem to have, this will be very hard to justify to an insolvency practitioner or liquidator.
It is likely to be decided that the director would need to repay the overdrawn director’s loan amount back to the liquidator who will then use these funds to pay creditors. It is crucial to ensure all creditors are treated the same, so a company bank account would be scrutinised for payments, to ensure nobody, including directors have received preferential treatment.
If the director is unable to repay the overdrawn loan account figure, this would be treated as income and will show as untaxed. HMRC would be informed and would be chasing for the tax on this figure in addition to any National Insurance contributions through the normal PAYE/salary methods.
So, if your director’s loan account is overdrawn and you are unable to repay it or decided that rather than repay it to the company, the business would ‘write it off’ as a dividend or bonus, this will of course ‘clear’ your director’s loan account to the point of it being balanced. However, the amount written off will be treated as your personal income.