Ten things you should know about the directors' loan account

Amounts due to the director from the company should be recorded in the ... Also, an overdrawn director loan account cannot be avoided by lending money to a ... Tenthingsyoushouldknowaboutthedirectors’loanaccount Home Technicalactivitiesandadvice UKtechnicaladviceandsupport BacktonullReliefforUKpropertyrentalbusinessespost-Covid Howtorelievepost-cessationpropertybusinessexpenses Accountantsandvolunteersauditingcharityaccountscouldfacesanctionsforfallingfouloftheirdutytoreportobligations Feedisputesandspeculativeclaims Anassessmentof‘PayAsYouGrow’options JoinACCA’sglobalpracticecommunity FlexibleCPDandlearningfromACCAProfessionalCourses HowtoavoiderrorswhensubmittingP11D Tenthingsyouneedtoknowforsuper-deduction CouldyourclientsbecaughtoutwithIR35rules? 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P11D–implicationsforinterest-freeorcheaploans Filingnon-MTDVATreturnsduringtransition MTDforVAT:avoidpenaltiesassoft-landingperiodends HMRCisdevelopingnewdigitalservices HMRCrelaunchesagentdedicatedline HMRCcompliancechecks Tenthingsyoushouldknowaboutthedirectors’loanaccount Failedfurloughclaims Guidestosharewithyourclients Trackyourprogressandmeasurewhatmatters AspractitionersfinaliseP11Dformsfortheyearended5April2021,brushuponyourknowledgeofdirectors’loanaccountsandtaximplicationsarising 1.Whatisadirectors’loanaccount(DLA)? DLA isanaccountonthecompanyfinancialrecordsthatreportsalltransactionsbetweenthedirectorandthecompany.Amountsduetothedirectorfromthecompanyshouldberecordedinthecompany’sbooksasacreditorwhiletheamountsduefromthedirectortothecompanyshouldberecordedasadebtor.  2.Isitonlytransactionswiththedirectorsthatneedtoberecorded? No,ifthecompanyisaclosecompanyany‘private’paymentsmadebythecompanytoadirector’sfamily,friends,businesspartneroranypersonassociatedwiththedirectormayneedtoberecorded.Also,anoverdrawndirectorloanaccountcannotbeavoidedbylendingmoneytoapersonconnectedwiththedirector.Aclosecompanyisonethatiscontrolledbyfiveorfewerparticipatorsorbyanynumbersofparticipatorsifthoseparticipatorsarethedirectorsofthecompany.  3.Isanoverdrawn DLA illegal? No,CompaniesAct2006hasremovedthegeneralprohibitiononacompanymakingloanstodirectors.Therulehasbeenreplacedbytherequirementtoobtainpriorshareholderapproval.Therearefewexemptionswhenmembers’approvalisnotrequired.Asageneralruleforloansofmorethan£10,000shareholderapprovalmustbegivenbeforehand.Oftenadirectorisalsoacontrollingshareholdersotheapprovalismoreaformalityratherthanalegalissue. PractitionersmustalsobearinmindtheCompaniesActprohibitionsonunlawfuldividends whenreviewingoverdrawnDLAs.  4.Cananoverdrawn DLA beoffset? Theremightbesituationwherethecompanyhastwodirectors(eghusbandandwife)andonedirectorowesmoneytothecompany,whiletheotherisowedmoney.Inordertobeabletooffsetthesebalances,thedirectorsmustformallyagreeinwriting(andproperdocumentationshouldbekept)beforeanyoffsettingtakesplace.  5.Doesabenefitinkindariseonanoverdrawn DLA? Iftheloanisgreaterthan£10,000(£5,000fortaxyearsupto2013-14)abenefitinkindwillariseonthecashequivalentoftheamountofinterestthatwouldbepayableattheofficialrate. Benefitinkind willnotariseiftheloandoesnotexceed£10,000orthedirectorispayinginterestontheloanattheraterecommendedbyHMRC.   Thecashequivalentisusuallycalculatedusingtheaveragemethodunlessthedailymethodprovidesasignificanthighercashbenefit.Theaveragemethodworkswellwhenthebalanceinthe DLA doesnotfluctuateduringtheyear.  6.Arethereanyothertaximplicationsonanoverdrawn DLA? Ifthe DLA remainsoverdrawnninemonthsafterthecompanyaccountingperiod,section455CorporationTaxAct2010(s455 CTA 2010)providesforataxchargeattherateof32.5%ontheloweroftheamountoutstandingattheyearendandninemonthsaftertheyearend.Thisamountispayableevenifthecompanyismakingalossandthereisnocorporationtaxdue.Taxpayableundersection455isatemporarytaxanditisrepayabletothecompanybyHMRCninemonthsaftertheendoftheaccountingperiodinwhichtheloanwasrepaid.Oncetheloanisrepaidthetaxeffectisnil;however,thetimelagbetweentheloanbeingrepaidandtaxbeingrefundedcanplaceasignificantstrainonthecompany’scashflow.  S455appliesnotonlytoadirector’sloanaccountbuttoaloantoaparticipatorofaclosecompany.HMRCdefinesaparticipatorasapersonwhohasashareor‘interest’inacompany.   7.Arethereanyexemptionstothechargeunderfors455 CTA 2010? Section455doesnotapplyto: aloanmadeintheordinarycourseofabusinesscarriedonbyacompanyifthebusinessincludesthelendingofmoney adebtincurredforthesupplybyaclosecompanyofgoodsandservicesintheordinarycourseofitstradeunlessthecreditgivenexceedssixmonthsorislongerthannormallygiventothecompany’scustomers aloanmadetoadirectororemployeeofaclosecompanyiftheamountdoesnotexceed£15,000,theborrowerworksfulltimeforthecompanyandtheborrowerdoesnothaveamaterialinterestinthecompany.Apersonhasamaterialinterestinacompanyforthispurposeiftogetherwithanyassociateheorsheisabletocontrolmorethan5%ofordinarysharecapital.  8.Whataretheaccountingdisclosurerequirements? CompaniesAct2006section413providesfordisclosureofthedetailsofanyadvanceorcreditgrantedbythecompanytoitsdirectors.Thedetailsrequiredaretheamountoftheloangrantedduringtheyear,anindicationoftheinterestrate,itsmainconditionandanyamountrepaidorwrittenoff.Inthenotestotheaccountsmustalsobestatedthetotalamountoftheloanandthetotalamountofinterestcharged.Disclosurefortransactionwiththedirectorsisalsorequiredunder FRS 102:RelatedPartyDisclosuresandFRS105:NotestotheFinancialStatements.  9.Cana DLA bewrittenoff? Thecompanycanwriteoffaloangiventothedirector.Theloanmustbeformallywaivedastheliabilitywilltechnicallyremainifthecompanyjustagreesnottocollecttheoutstandingbalance. TheamountwrittenoffistreatedunderIncomeTax(TradingandOtherIncome)Act2005asadeemeddividend.Becauseitisadeemeddividendthereisnorequirementforthecompanytohaveavailableprofitsfordistributionandthedividenddoesnotneedtobepaidtoallshareholdersofaparticularclassofshares.However,animportantfeatureofaloanbeingwrittenoffisthatinmostcasesHMRCwillarguethatwritingoffaloancomesunderthedefinitionof‘emolumentsfromanofficeoremployment’andasaresultwillseektocollectClass1NICfromthecompany. Theamountofloanwrittenoffwillhavetobeincludedinthedirector’sself-assessmenttaxreturnonaspecificboxonthe‘additionalinformation’pages.Forincometaxpurposestheamountistreatedasdividendwiththeusualtaxcredit. Thecompanywillnotreceivecorporationtaxreliefontheamountoftheloanwrittenoff.  10.Whataretheconsequencesontheoverdrawn DLA ifthecompanygoesintoliquidation? Theliquidatorcandemandthatthedirectorrepaystheamountowedtothecompanyinordertopaythecompany’screditors.Theliquidatorcantakelegalactionagainstthedirectororevenmakehimbankrupt.  Inconclusion,whenthedirectorborrowsmoneyfromthecompany,goodrecord-keepingisessentialtoensuretherighttaxesarepaid.Thedirectorshouldbeawarethatiftoomuchmoneyisborrowedandthecompanyisunabletopayitscreditors,thecompanymightbeforcedintoliquidationandtheliquidatorcantakelegalactionagainsthimtoreinforcethedebt. 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