Directors Loan Accounts
How they work
This is the last in a series of blogs looking at Directors’ Loan Accounts (DLA), to help Directors have a better understanding of how they work, the implications of an overdrawn directors’ loan as well as looking at repayment, interest and tax implications.
Interest and Overdrawn Directors’ Loan Accounts
If you have an overdrawn DLA that remains unpaid 9 months and one day after your company year end, HMRC will charge the company additional corporation tax on the amount not repaid and this will accumulate until the accounting period in which the DLA is repaid.
HMRC will view any loan above and beyond £10,000 as a cash benefit for the director or shareholder. Ultimately, you will have benefited from an interest free loan.
So what would happen next?
- Interest can be charged from the company to the director for the overdrawn amounts, this is chargeable at HMRC’s official interest rate.
- The loan will be treated as a ‘benefit in kind’ and it would need to be reported on a form P11D and Class 1 National Insurance would need to be calculated and deducted.
The loan will need to be reported on your personal self assessment tax return and you may have to pay the tax on the ‘loan’ calculated at the official rate of interest.
There are a few scenarios / complexities which should be considered regarding interest paid on overdrawn DLA’s and here at RIFT Accounting we would suggest you discuss your scenario with us, it may be that a conversation regarding the business would avoid this from happening.
Repayment of an Overdrawn Director’s Loan Account - What if you Cannot Pay it Back?
When a business comes across a difficult time for cashflow, it is not unusual for the Directors to dip into the DLA particularly when money might be tight for the director personally, but this money should be treated as a company asset, and the limited company is a legal entity in its own right, so it is important that you consider when you ‘borrow’ from the DLA, whether this is the best idea and also when and how you will repay.
If your limited company becomes insolvent, then you should consider your trading options immediately. It can have serious personal implications for you as a director as we have discussed above, and also Parts 1 and 2 of the DLA blogs if you have an overdrawn DLA.
So if there is an overdrawn DLA, it is important to remember:
If you have taken money from your DLA for a short period to ease cashflow, you should put it back as soon as possible, and within the timescales, which will avoid you paying national insurance and loan interest on the DLA personally.
You should not be withdrawing bonuses or dividends from your company if it is not making a profit. This will add to an existing overdrawn DLA and the scenario explained above could apply.
If your company is heading towards liquidation, whether voluntary or not, or you are looking to cease trading and you currently have an overdrawn DLA, you should seek advice from us here at RIFT Accounting at the earliest possible opportunity, so we can work with you and advise you going forward.