The Director's Loan Account

Written by Sally Fletcher for plan.it, February 9 2012

The Director's Loan Account (DLA) records any balance owed between a director and the company. A credit balance is owed to the director and a debit (also known as overdrawn) balance is owed to the company.

Transactions through the account might include:

salary and expenses due but not paid to the director
dividends voted but not physically paid to the director
shares issued on company incorporation but not paid for
a director's private bills paid for by the company
company bills paid personally by the director
a loan to the company from the director; or
a loan to the director from the company.

Example

Description	Debit	Credit	Balance
Share capital	2		2 Dr
Business expenses paid personally		685	683 Cr
Cash withdrawal by director	2500		1,817 Dr
Salary not paid		1,500	317 Dr
Dividend distribution		2,000	1,683 Cr

Under the Companies Act 2006, the DLA should not be overdrawn, although there are no penalties if it is. However, there are corporation and personal tax implications.

Overdrawn DLA and reporting requirements

A DLA that is overdrawn by £5,000 or more at the end of a tax year (April 5th) will be classed as a director's loan and is a benefit in kind (BIK). Unless interest is charged at HMRC approved rates or higher, it must be reported on form P11d. The company will pay 13.8% Class 1a NICs and the director pays personal tax on the cash equivalent value of the interest not paid on the loan.

Calculating the cash equivalent value

If the company is a ‘close company' (a company under the control of 5 or fewer participants - usually the director(s)) an election can be made to class all loans throughout the year as a single loan.

Example

1	Maximum balance when the loan was taken out	£7,500
2	Maximum balance on the day the loan was discharged or April 5^th if not	£7,500
3	Total of 1 and 2 divided by two	£7,500
4	Number of months the loan was outstanding	6
5	Multiply 3 by 4 then divide by twelve	£3,750
6	Multiply 5 by the official rate of interest (4%)	£150
7	Less any interest already paid in the year	£0
8	Cash equivalent value of the taxable benefit is	£150

Section 455 Tax

Any overdrawn balance at the company's year-end date will need to be recorded on the CT600 company tax return, regardless of whether it is paid back within nine months and one day - the due date for payment of corporation tax.

If the balance remains overdrawn at the account's filing deadline, an additional 25% corporation tax - known as Section 455 of the Corporation Taxes Act 2010 (formally S419) - will be payable together with the corporation tax by the company. This can be reclaimed at a later date if and when the loan is repaid to the company.

Clearing an overdrawn DLA

To avoid paying additional corporation tax, the DLA balance should be nil or in credit. The director could pay personal money into the company or make an additional dividend distribution from retained profit. If a dividend is voted prior to April 5^th there will be no P11d reporting required or BIK charge arising.

Example

The company accounting year ends 31^st March 2012. The DLA is overdrawn by £7,500 and there is £18,000 of distributable profit available. The director's earnings to date in the fiscal year ending 5^th April 2012 are £55,750 and projected at approximately £60,000 for the forthcoming year.

1) Vote a dividend before 5^th April 2012 and the director would be liable to 22.5% higher rate tax payable by 31^st January 2013. There would be no BIK to report on the P11d and no class 1a NICs due.
£7,500*22.5% = £1,687.50 higher rate tax due

2) Vote a dividend between 6^th April 2012 and the filing deadline of 1^st January 2013: S455 tax is not due, but the company will pay 13.8% class 1a NICs and the director 40% personal tax on the cash equivalent value of the loan.
£7,500*22.5% = £1,687.50 higher rate tax due
£7,500*4% cash equivalent value = £300*13.8% class 1a NICs = £41.40
£7,500*4% cash equivalent value = £300*40% higher rate personal tax =£120
Total cost £1,848.90

Reclaiming S455 Tax

Additional tax paid can be reclaimed nine months (and a maximum of 4 years) after the end of the accounting period in which the overdrawn balance was cleared.

Example

Your company paid S455 tax of £2,000 on 1^st January 2010 for a loan account of £8,000 that was outstanding at the company financial year ending 31^st March 2009.

The loan was repaid in full on 1^st March 2012. You can reclaim the tax paid any time after 31^st December 2012 up until 31^st March 2016.

Prior to 31^st March 2010, different time limits applied and reclaims could be made for up to 6 years from the end of the financial year in which the loan was repaid.

If a claim is made within 24 months from the end of the accounting period in which the loan was paid off, the company tax return can be amended and re-submitted. Claims after this time need to be made in writing at the time the next corporation tax return is submitted.

Loans that are released or written off

Where the loan has not been repaid and it is written off in the accounts, the amount will be treated as income for the director and personal tax and NICs will be due.

Loans made to the company (credit DLA)

Where the company pays the director interest on a loan, the company must deduct 20% withholding tax before the interest payment is made. The director must declare the interest as income on the self-assessment tax return and pay any further tax due. The company is required to report interest paid on form CT61 and pay the withheld income tax to HMRC on a quarterly basis. The company will receive corporation tax relief on the interest payments.

This brief is for guidance purposes only. In all cases we would recommend that you discuss any queries with professional advisers. plan.it Services is a firm of Chartered Accountants regulated by the Institute of Chartered Accountants in England and Wales. Please feel free to contact us if you have any questions relating to this article or other accounting issues affecting contractors.