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Director’s Loan Account
Although a Director’s Loan Account may seem complex, it is vital to understand exactly how this important transaction works. You should seek specialist tax advice from your accountant for the intricacies of this type of transaction (for the avoidance of doubt and the sake of clarity the information provided on this website should not be construed as advice on the tax implications of a director’s loan account in any capacity whatsoever).
Taking money from your business as a Director’s Loan is often recommended by accountants and the tax implications and overall reconciliation are left to be resolved at the end of the financial / tax year with the loan being applied in part or whole against say salary or dividends against profits.
As a director, when the need arises to withdraw money from your own company, you need to keep documents that record these transactions; these is known as a Director’s Loan Account. If no money has been withdrawn, your Director’s Loan Account will have a balance of zero. If the account becomes overdrawn, it becomes a more complex matter.
Once your Director’s Loan Account becomes overdrawn, you will need to follow a certain protocol to avoid any tax related issues. If you withdraw money from the company that can’t be classed as salary or dividends, and this amount is more than you have actually paid into the same account, it becomes overdrawn.
The best way to remedy this situation is to work out a plan whereby you repay the money within nine months of your business year end. Speak to your accountant for the best repayment option; if you are struggling with repayments, issues can and usually will arise.
HMRC will view this transaction as an interest-free loan, and will usually ask you to pay tax on some or all of this amount. If you still owe this money by the end of the tax year, you could be liable for more problems with HMRC. If you keep the total amount borrowed under £10,000 your issues will be reduced substantially.
Whilst the use of a director’s loan account may be acceptable for a solvent company the game changes dramatically in the event of insolvency. Directors need to act with great caution as this “pie in the sky” scheme will be closely scrutinised by any insolvency practitioner appointed in a formal insolvency and it may need to be repaid in full or in part.
The risk for directors of a company which is or may become insolvent provides a period of vulnerability running back from the moment the insolvency procedure commences. Certain transactions have a time limit on how far back the Insolvency Practitioner may claw back, however directors need to be aware that other heads of attack have no such time limit.
If the warning signs are there of potential insolvency, then failure to act may leave you exposed! Call us now on 0800 009 6106 and we’ll be happy to discuss your current predicament and the options available to you and your business.