Directors might opt to either lend money to or borrow from their own company. This type of transaction is called a director’s loans, and they are recorded in the Director’s Loan Account.
Engaging in loans between the director and the company, or with another stakeholder, is fraught with risks.
The DLA does not involve the director’s salary, dividends received, or any expenses claimed.
DLA mechanism
At its core, the DLA tracks financial transactions between the director and the company. If a director withdraws more than their contribution to the company, the account is deemed overdrawn.
On the other hand, when the company owes more to the director than it has borrowed, the company is in credit.
Interest and tax implications
The interest rate on a director’s loan is at the company’s discretion.
However, if a director borrows money below the company’s official interest rate, and if the sum surpasses £10,000, HM Revenue & Customs (HMRC) might perceive this as a taxable benefit.
DLAs over £10,000 are automatically seen as a benefit in kind (P11D Benefit), leading to income tax obligations.
In such situations, the company also has National Insurance responsibilities. However, for loans below £10,000, the tax depends on the repayment timing.
Repaying within the same fiscal year and under the £10,000 mark ensures no need to pay Corporation Tax or to mention it in the company tax return.
Legal considerations
There are legal intricacies tied to director’s loans. Legally, companies must maintain a DLA detailing all money transactions between the director and the business.
This covers any personal expenses settled by the company, any cash withdrawals, and even expenses borne by the company that a director might decide to cover (this is viewed as a director’s loan to the company).
Directors are obligated to clear their debts to the company, regardless of its financial standing.
Failure to do so could invite legal repercussions from potential buyers or liquidators. Post loan repayment, directors should refrain from borrowing again for at least 30 days.
Additionally, “accidental dividends”, like inadvertent withdrawals during a loss phase, need to be repaid within nine months.
Should you loan?
Opting for a director’s loan could be perceived as a destabilising move by stakeholders and clients, hence it’s imperative to proceed with caution.
The potential tax complications and legal nuances mean that maintaining meticulous DLA records is crucial.
HMRC often scrutinises director’s loans for potential tax evasion, reinforcing the importance of transparency.
For in-depth advice on Director’s Loan Accounts tailored to your business needs, please contact us.
