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Both Company law and HMRC require that records of money borrowed by a director from his/her company and money lent to it are maintained as part of accounting and tax obligations. At the outset it’s important to remember that the company’s money is not the director’s money.
In the context of a small business, a DLA is likely to have a number of transactions within it. Often it will show cash taken by the director, perhaps to fund unexpected personal expenditure. This may cause the account to go ‘overdrawn’ and a ‘loan’ is effectively created between the company and the director.
Overdrawn loan accounts are often repaid by the declaring of dividends which are not taken out by the director/shareholder but used to clear the debt.
If a DLA remains overdrawn 9 months after the company’s accounting period end a tax charge becomes payable by the company based on 33.75% of the outstanding overdrawn balance. If the loan is subsequently repaid, then HMRC will repay this temporary tax charge.
Having an overdrawn DLA of more than £10,000 is also potentially bad news for the director on the personal tax front. Enjoying an interest-free loan can lead to an income tax ‘benefit-in-kind’ charge but if the loan is repaid later there is no income tax refund to follow.
If the company and director decide that the balance on the overdrawn loan account should be written off, there are again tax implications. In these circumstances the amount written off is treated as being a dividend in the director/shareholder’s hands.
Having a credit balance on a DLA is not unusual and there are no tax implications of doing so unless the director intends to charge the company interest. In that case the interest payable could be a business expense of the company but which would be taxable in the director’s hands.
DLAs are a particular area of interest to HMRC, and care should be taken to avoid actions aimed at avoiding tax. There are now ‘bed and breakfast’ rules which trigger to prevent the clearing of larger overdrawn DLA balances and replacing them with fresh withdrawals immediately afterwards.
Yes, although shareholder approval must be given for loans of more than £10k. Often a director is a controlling shareholder, the approval is more a formality than a legal issue.
No. Benefit in kind will not arise if the loan does not exceed £10,000
This will depend upon whether it is a solvent liquidation (all company debts paid and the balance of funds distributed to shareholders) or an insolvent liquidation where there are outstanding creditors. In the latter instance the liquidator can demand that you repay the amount owed to the company to pay the company’s creditors.
Yes. It’s important that you have kept proper records and receipts and that you can show it is genuine business expenditure on which the company can claim a Corporation Tax deduction.
Yes.
No, but if you have a beneficial loan which is being reported by your company to HMRC there will be a Class 1 NI charge of 13.8% payable by your company on the beneficial loan interest.
No. This type of transaction would be regarded as being one made at your direction and HMRC would ‘look through’ the arrangement and consider the funds as being for your use.
This is done using the HMRC form P11D which should be filed by 6 July after the end of the tax year on 5 April. You should also have a copy of that form to enable you to make the appropriate entries on your personal tax return.
If you have concerns about your own situation or require further detailed advice, please don’t hesitate to contact our experienced team.
