HMRC describes a directors’ loan as follows:
“If you’re a company director and take money out of your company that’s not a salary or a dividend – over and above any money you’ve put in – you’re classed as having received the benefit of a director’s loan”.
If you think about it, if you have been self-employed, you can simply take money out of your business bank account at any time and use it as your own as there is no difference between your business and personal situation; it’s all yours. However, when you’re a director of a company and take money out of the company bank account then the money is not yours, it belongs to the company. The company is a legal entity in its own right. The bottom line is, however, if you have taken money out of the company bank account without paying tax or national insurance from the company, then you’ve received the benefit of a directors’ loan and the money will need to be repaid.
Overdrawn DLA Tax Resonsibilities
If your director’s loan account becomes overdrawn then your company must pay tax on any amount you haven’t repaid prior to nine months after the end of your Corporation Tax accounting period.
Directors often overlook the fact that as a director of a company, you must manage your directors’ loan account very carefully, making sure you include all entries accurately and on time. Be aware that HMRC can and often will question you about your directors’ loan account as part of any Corporation Tax compliance check at any time.
To be clear, if you, as a director, loan money to your company, the directors’ loan account is in credit. This only applies if you have paid the money into the company bank account, but does NOT apply if you bought the company shares for example.
If your company lends money to you, your directors’ loan account is in debit or ‘overdrawn’. Remember, if you take money out of your company’s bank account, over and above money that you’ve loaned to the company – and that money is not a salary or a dividend, then this can become an overdrawn director’s loan account.
Repaying your Loan
A director’s loan may be repaid by paying money into the company’s bank account or not taking money owed such as; a dividend, salary or bonus for example. There are other technicalities involving writing off directors’ loans, but they must be demonstrated as being legitimate and a clear audit trail of evidence should be made available.
Whether your company has to tell HMRC that your director’s loan exists and pay tax on the outstanding loan amount depends on when the loan is repaid. Strictly speaking, this tax is not Corporation Tax. In practice, you calculate the tax on your overdrawn loan in your company’s tax return and add it to the Corporation Tax that’s due.
To speak to someone about an overdrawn position ideally call when considering company liquidation on 08000 746 757.