An overdrawn director's loan account is created when a director (or other close family members) ‘borrows’ money from their company. Many companies, particularly 'close' private companies, pay for personal expenses of directors using company funds. Where these payments do not form part of a director’s remuneration they are usually posted to the director’s loan account (DLA).
The DLA can represent cash drawn by a director and payment of other personal bills and expenses.
Whilst it is quite common for small company accounts to show an overdrawn position on a DLA, this can create some unwelcome consequences for both the company and the director. The rules are further complicated if the loan is for more than £10,000.
Where certain DLA's are not paid off within nine months and one day of the company's year-end, there is an additional corporation tax (CT) bill of 32.5% of the outstanding amount (prior to April 2016 this rate was 25%). In most cases, this is not a permanent loss of revenue for the company as a claim can be made to have this CT refunded (but not interest) when the loan is paid back to the company. To be effective, the claim to have the tax refunded needs to be made within 4 years after the end of the year in which the participator's loan was repaid.
Another unwelcome tax consequence is the levy of a personal benefit in kind tax charge if the company does not charge an approved rate of interest for the use of company funds. Consequently, an overdrawn loan account should not be considered without due attention to the CT, income tax and national insurance consequences. There are planning options that will soften the impact of these charges. Please call if you would like our advice.