The Directors Loan Account

net amounts due of salaries and dividends not yet paid to the director; reimbursements of expenses paid by the director. Cash In. If you loan money to your ... 01449258548 [email protected] Facebook Twitter Facebook Twitter TheDirectorsLoanAccount Generally,therearenotaximplicationswhenasoletraderorpartnershipputscashinortakescash outofabusiness. Acompany,ontheotherhand,isaseparatelegalentityandanycashassetsheldbythecompanybelongtothecompanyandnotthedirector/s.Anycashdrawnbythedirector/s thatisnotpartofaremunerationpackageorarepaymentofbusinessexpensesisconsideredtobeadirectorsloan. Thedirectorsloanaccountissimplyarecordofalltransactionsbetweenthecompanyandthedirector/s.YoumayalsohearitbeingreferredtoasaDirector’sCurrentAccountoraDLA.It’sthesamething.Theamountowedtoorfromthe director.Iftherearemultipledirectorsinthebusiness,eachwillhaveaseparatedirector’sloanaccountinthebalancesheet.TheDLAisabalancesheetaccountofcoursebecausethebalanceiseither: anasset–moneyowedtothecompanyor, aliability–moneyowedtothedirector. DLA’scanbemadeupof: moniesdrawndownbythedirector personalbillspaidbythecompany Offsetby: netamountsdueofsalariesanddividendsnotyetpaidtothedirector reimbursementsofexpensespaidbythedirector CashIn Ifyouloanmoneytoyourcompany thenyourdirectorsloanaccountisincredit –thecompanyowesyou,thedirector–andtheliabilitywillbeshowninthebalancesheet. Sayyouput£10,000intothecompanyonthe31stJanuary.Thisinjectionofcashwillshowasabalanceowedtothedirectorandcanbedrawndownatanytimewithoutanytaximplications.   31-Jan-xx Beinganinjectionofcashintothecompany Transaction Debit Credit Bank  10,000   DirectorsLoanAccount    10,000 Total 10000 10,000        CashOut Ifyoutakecashoutofthebusiness,thenyourdirectorsloanaccountisoverdrawn –youowethecompanyandtheassetisshowninthebalancesheetuntilyourepayit. Sayyoutake£10,000outofthecompanyon31-January.Theloanfromthecompany willshowasabalanceowedtothecompanyfromthedirector.Ifthisweretheonlytransactioninthedirectorsloanaccountitisconsideredtobeoverdrawn.   31-Jan-xx Beingaloanof£10,000tothedirector Transaction Debit Credit Bank    10,000 DirectorsLoanAccount  10,000   Total 10000 10,000       ATypicalDirector’sLoanAccount Inmanysmallowner-managedbusinesses,thedirector/swilltreatthecompanybankaccountastheirownanddrawcashfromthecompanyastheyneedittocovertheirpersonalexpenses. Director’sloanaccountscangetquitebusyasthecashwithdrawalsaccumulateovertime. So,whatcanwedotoreducethebalanceofthedirector’sloanaccount? Paythedirectorasalary. Adirectorspayrollcanberunmonthlyorannuallytooffsetsomeofthecashpaymentsmadetothedirector:See: TaxEfficientDirectorsSalaries Makesureanybusinessexpensespaidpersonallyareclaimed.See Effectiveexpenseclaimsmanagement Claimallbusinessmileage. Claimfortheuseofhomeoffice.See:DirectorrentingofficespacetotheCompany Payadividend:Payingdividends Sellanypersonalassetsusedbythebusinesstothebusiness. Atypicaldirectorsaccountmaylooklikethis:   Asampledirectorsloanaccount–1stto31stJan-xx Bobisanowner-managerdirectoranddraws£250.00aweektopayhispersonalexpenses.Hisaccountantrunsadirectorspayrollandattheendofthemonth,Bobputsaclaiminforhispersonalexpensesbutdoesn’tdrawthecash.Heallowshisexpensestopartlyoffsetthecashthathehasdrawnduringthemonth. Transaction Debit Credit Balancebroughtforwardfrom31Dec  1,000.00   07-Jan Cashwithdrawal  250.00   14-Jan Cashwithdrawal  250.00   21-Jan Cashwithdrawal  250.00   25-Jan Directorspayroll–netsalarypayable(owedbut notactuallypaidinthisexample)    857.98 28-Jan Cashwithdrawal  250.00   31-Jan BusinessExpensesclaimed–stationerypaidpersonally     25.00 31-Jan BusinessMileageclaimed –150milesat.45ppermile     67.50 31-Jan Useofhomeoffice(calculatedperHMRCapprovedmethod)     80.00 Total 2,000.00 1030.48 Balancecarriedforwardasat31Jan 969.52         InthisexampleBobstillhasanoverdrawnloanaccount–hehasdrawnmoreoutincashthanheisowed. It’sperfectlyacceptabletopaydirectorssalariesandexpensesastheyariseordeclareamonthlydividend(assumingthecompanyissufficientlyprofitable)tocleartheDLAeachmonthorquarter.Thisdoesrequirealittlemoreadmintimeandeffortbutmeansthatyouwillknowexactlywhereyoustandintermsofpersonalearningsandyourbusinessaccounts. MonitoringtheDLA Bob,beingthewiseandsavvydirectorthatheis,willmonitorhisDLAmonthlytomakesurethatheunderstandshowmuchindebitorcredithemightbe.Byprocessingamonthlypayrollandpostinghisexpensesashegoes –hewillhaveaclearpictureofhowthoseexpenseswillimpacthisprofitandlossaccountandwhetherornothisDLAislikelytobeoverdrawnattheyearend. AccountingfortheDLAatYearEnd ThereareonlythreepositionsthattheDLAcanbeinatyearend: Debitbalance–i.e.overdrawn.Thedirectorowesthecompany.AnoverdrawnDLAiseffectivelyaninterest-freeloantothedirectorandcanhaveserioustaximplications.See: Overdrawndirectorsloanaccount? Nilbalance.Great! Creditbalance–i.ethecompanyowesthedirector.Therearenotaximplicationsforthedirectorbutifyoudofrequentlylendmoneytoyourcompany–domakesureyouradvanceisprotected.Doyouhaveaformalloanagreementinplaceandconsidercharginginterestuntiltheloanisrepaid. ClearingtheDLAatYearEnd Thereareseveraloptionsavailabletoclearanoverdrawndirectorsloanaccount. Profitspermitting,declareadividend Iftherearenotsufficientprofitsinthebusinesstopayadividend,considerpayingabonus.ThiswillcreateataxandNIliabilitybutmaybepreferableto havinganoverdrawnDLA Cashrepaymentoftheoverdrawnbalance OverdrawnDLAatYearEnd Overdrawndirectorsloanaccountsiseffectivelyaninterest-freeloantothedirectorandcanhavequitecomplextaximplications: CorporationTaxS455– 25%ofthebalanceofanyoverdrawndirectorsloanaccountstilloutstanding9monthsand1dayaftertheendoftheaccountingperiod.Thiscanbereclaimedinthenextaccountingperiodiftheloanisrepaid. Loansover£10,000(£5,000upto5/4/2014) –cantriggerabenefitinkindreportableonaP11DcreatingaClass1NationalInsuranceliability.Ifthecompanyischargingnointerestorinterestbelowtheofficialratethenthereisa‘cashequivalent”benefitoftheinterestthatwouldhavebeenpaidifthedirectorborrowedthemoneyfromacommerciallender. 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