The Director’s Loan account is one of the areas that causes most confusion to business owners. So, how do you avoid the risks that come with it?
Watch our video, or read about it below.
What is a Director’s loan account?
At its simplest, it’s a record of all of the transactions between you, as a Director, and the company itself. The Limited Company is a separate legal entity to you, and its bank account is separate to yours.
When you set up the business, you probably had to put a bit of money in to get it going. That is treated as a loan. A loan from you, the Director of the business, to the company.
As the company goes forward, there are likely to be more transactions on this loan, for example, you might use cash to buy something on behalf of the company, such as paying for parking or a taxi. Perhaps you use your own credit card for some purchases. In these instances, you’ve used your money to pay for things for the company. Therefore, the company owes money to you, the Director and it is credited to your Director’s Loan Account.
The flip side is, there are times when the company pays for things for you. Perhaps you used the company bank card to pay for a personal meal. The main example is when the company transfers money from its bank account to yours, and that money isn’t already recorded in the payroll as a salary or declared as a dividend. It’s just a cash transfer.
In a small business, this isn’t unusual. You are the owner and manager of the business and transferring money to and from your own bank account is relatively common. The key thing is that it is all part of the Director’s Loan and it must be accounted for as such.
What are the risk areas?
There are a number of risk areas in the Director’s Loan Account.
Review of the accounts
If the company pays for personal expenditure incurred by you as a Director it must be recorded correctly. It will either be an allowable company expense if it is part of your director’s remuneration package, or if it is just personal expenditure, it will need to be recorded in the Director’s Loan Account as an amount you owe to the company.
Loans to participators
If you withdraw more cash from the company than the company owes to you, your directors loan account balance will be a debtor. If this is the case at the year end, corporation tax may become payable at 32.5% on loans to you as the Director, if you are also a shareholder. This additional corporation tax charge will become payable by the Company if the loan remains outstanding 9 months and 1 day after the end of the accounting period, ie by the deadline date to pay the Corporation Tax.
Therefore, you need to review any overdrawn loan accounts to check whether your company is liable to pay this tax.
Review of expenses and benefits
Where you, as a director, are provided any benefits that aren’t standard salary, you may need to report them to HMRC as a benefit in kind on form P11D. You should review any expenses and benefits for taxable items that could have been missed.
If your Director’s Loan account balance exceeds £10,000 at any time in the tax-year and you do not pay interest to the company, you will have a benefit in kind charge on the expected interest on the loan. HMRC use an official interest rate to calculate this.
Self-Assessment Tax Return
You may need to file a Self-Assessment Tax Return. This will be the case if you receive any income from the company or taxable income from other sources. Any benefit in kind you receive would need to be included on this return and is taxable.
Record keeping
Good record keeping is essential. If your records are poor it may mean that expenditure is missed or has been allocated incorrectly.
HMRC does provide a Director’s Loan Accounts toolkit that can be found on the GOV.UK website. This provides help in this area.
If you’d like to know any more, please get in touch with us.