What is a Director's Loan Account? (Part 1)
Posted on 29th August 2019
Also known as a DLA, a director’s loan account details all of the transactions that are made between a company and its director(s). It is important that you understand the implications of the transactions that occur between company and director.
As a director of a limited company, you will have access to the company bank account – even though the money within it doesn’t strictly belong to you. If the director’s loan account is used correctly, it can prove to be a great option forcashflow - however, it does include risks that you should be aware of.
If a director takes money out of the DLA for a reason that is not related to the business, the amount taken out must, by law, be recorded in a DLA. When the financial year comes to an end, this will be recorded as either a liability or as an asset in the business's annual accounts. If the director owes the company money, this is an asset in the accounts and the director will need to repay the amount to the company. There are rules around when this needs to be repaid and the consequences of not doing so.
How a director's loan account may be used
As a small business, cashflow can often be a problem - both for the business and personally. There will be several different ways the directors loan account is used:-
To record personal spend - i.e. if a director paid for a personal item using the company business debit card (by accident, or due to low personal funds).
To record business expenses paid for personally by the director - i.e. if the company was low on funds and the director paid for a business item using personal funds
To record mileage incurred by the director when using their personal car for business travel
To record any cash withdrawn from the company bank account for personal spend
To record a loan made by the company to the director
To record a loan made by the director to the company
We would always recommend that directors keep personal spend through the company to a minimum, and wherever possible use business funds to pay for business items. However, in reality, particularly within small businesses, lined can sometimes get blurred or cashflow does not allow this.
It is therefore important that the directors loan account accurately records each entry, so that at the end of the year (or indeed at any point throughout the year), there is a balance of money either owed by the company to the director, or owed by the director to the company.
When you submit your company accounts, if the company owes the director, this will show as a liability in the accounts, and if the directors owes the company, this will show as an asset in the accounts. Another great reason for you to keep the records up to date and accurate. HMRC pay great attention to the directors loan account, so it is important that it is accurate.
What tax rules apply?
Corporation Tax
Tax implications will be wholly dependant on when the money is paid back. If the money that you have borrowed is paid back within the company's financial year (or within 9 months after the year-end), there are no corporation tax implications. However, if the loan remains outstanding 9 months and 1 day after the year-end, HMRC will request that the company pays additional temporary tax of 32.5%. This temporary tax will be repaid to the company once the loan is repaid in full.
A cautionary tale on this is to not pay off the loan and then take out money directly after. HMRC categorises this move as ‘bed and breakfasting’ - if you do this and the taxman picks up on it, the company will be taxed dependant on the amount you have taken out and will treat the loan as if it was never repaid.
Bed and breakfasting is a move done by many companies that don’t want to pay tax on the money that they have taken out. For this reason, it is important to discuss any potential loans with your accountant and time them correctly.
Personal Tax
If you take out an interest-free loan that exceeds £10,000, it will then be classed as a benefit of kind. It will also need to be recorded on a P11D – which is applicable for a Class 1A National Insurance payment, calculated at 13.8%. This type of spending should be done carefully and irregularly, to ensure that you do not accrue high levels of tax repayments.
Can a director's loan be written off?
A director’s loan is usually written off by the company if they are facing financial problems - often caused by hefty cash withdrawals. However, it is important to know that there are significant tax and accounting implications which need to be considered if you are trying to write it off – the specific implications of which will be dependant on the individual company’s finances.
It also has the risk of being reversed by the liquidator, resulting in the director having to pay off the remaining sum of the loan. When you are in this situation, it is vital that you discuss with your accountant the best course of action for your business before making any rash moves.
Next week, we'll be covering the pros and cons of director's loans - and more...
It is important that a director fully understands what a DLA can offer them and what the limitations of it are before making any personal transactions – without doing so could cause significant financial issues in the long term.
As it's just too much and too detailed to put into one blog post, next week we'll have 'part 2' for you which will look at the following:
What happens if your company owes you money?
Is there any interest on a director's loan?
Overdrawn DLA rules
Pros and cons of a director's loan account
Written by:
Nicola J Sorrell -
Effective Accounting
Founder | Xero Champion | IR35 Expert
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