A Director’s Loan Account is basically a record of transactions (Director’s Loans) between the individual Director and the Company, outside of normal salary of dividends.
If a director takes out more money from the company than they put back in, the Loan Account becomes overdrawn and is essentially classed as a company asset because of the liability it can accrue.
In order not to become ‘overdrawn’, a Director’s Loan has to be paid back within 9 months and 1 day of the end of the accounting period. If the loan is still outstanding after that time, you will be charged a Corporation Tax (Section 455) penalty of 32.5% on the loan amount.
If the loan exceeds £10,000 there will also be National Insurance (Class 1A) and income tax implications (where the director is liable to pay on the cash equivalent of the benefit, calculated using the average or daily method), and HMRC may conclude that the Director is using the money for salary (which is against their regulations).
In some cases, the loan can be written off – but the loan has to be treated as a distribution of profits and if the recipient of the loan isn’t a participator, then the outstanding amount would be taxed as employment income – and the Director would be responsible for mentioning this on their own individual tax return within the ‘Additional Information’ section.
In worst case scenarios, you may be forced into personal bankruptcy if you cannot repay the money and should liquidation of the company then occur the loan becomes an asset to be recovered, and the insolvency practitioner will have a duty to investigate the directorial conduct – which could result in a disqualification from holding the position of Director, and this disqualification could last for up to 15 years.
HMRC can and often do check, and question, Director’s Loans as part of their Corporation Tax compliance checks, in order to ensure their calculations are accurate – so it’s essential that any loan accounts are managed regularly, and the accounts are kept completely up to date with incomes and outgoings into the account.
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