Whether you’ve been running your company for years, or just set up, you may well have heard of the ‘Director’s Loan Account’ (DLA). But what is it, and what are the implications of having one?
DLA- it is what it says on the tin
As the name suggests, the DLA can only be utilised by the company director. The Director’s Loan account is either the amount of money that you owe your company, or the amount of money that it owes you.
If you withdraw from your company that isn’t either salary, dividend or reimbursement of such expenses, will be treated as a loan to the director and allocated to the DLA accordingly (a debit loan account). Also, any expenses paid for by the company that are deemed to be personal rather than business (i.e. that don’t meet the golden rule of being wholly, exclusively and necessarily for the purpose of the business) will also be put to the DLA. So, if your accountant, when preparing your year end accounts, finds expenses that are clearly personal and not business related, they may well move these to the loan account, meaning there will be an amount owed by you to your company.
On the other side, any expenses that you incur on behalf of the company personally will be treated as money that the company owes you and allocated to the DLA accordingly (a credit to the DLA). Equally, any cash injections that you may put into the business when you first set it up, or further down the line, will also be treated as money that the company owes you.
So, what happens if my company owes me money?
There are no corporation tax implications when the DLA is in credit. However, if you choose to charge interest on the amount that the company owes you, then that interest will be treated as personal income for you and should be declared on your self assessment return accordingly.
And what about if I owe my company money- are there any implications?
In short, yes! Whether you have a DLA in debit due to overpaid salary/expenses, or if you’ve chosen to take a loan out of the company, it will be treated the same way in the eyes of HMRC. You may have seen stories in the news about HMRC cracking down on companies that use loans as a way of ‘paying’ employees thereby avoiding tax and NI, so it is important that all director’s loans are recorded and declared appropriately, so that you don’t get a nasty surprise from HMRC in years to come.
Will I have to pay tax on the amount I owe?
Director’s loans may be taxed in two ways:
• If the DLA is overdrawn at the company year end date, then it will need to be repaid to the company within 9 months of the year end. If repaid, there will be no additional corporation tax. If, however, the loan is not repaid within 9 months, additional corporation tax will be payable at 32.5% (which can be reclaimed via a long and arduous process once the loan is eventually repaid).
• If the amount that you owe your company at any time exceeds £10,000, then it may be treated as a benefit kind if it is interest free. If interest of at least 2% per annum is paid on the loan, then it will not be a benefit in kind and so no tax/ni will be payable. However, if the loan is interest free (or a lower rate of interest is charged), then additional personal tax and class 1A NI (13.8%) will be payable when the P11d is prepared.
Bed and Breakfasting
If only this was a random section in our blog about having a lovely staycation at a B&B with a loan taken from your company! Instead, bed and breakfasting is the term applied to the ways in which directors ‘manage’ their loans to avoid the above taxes, and as a result, HMRC have introduced rules to combat this.
HMRC noted that a number of directors were deliberately trying to avoid the taxes due on loans by repaying anything outstanding before the year end date, and then a day or two later, withdrawing the money back out again (thereby avoiding the additional corporation tax we mention above). Unsurprisingly, HMRC were not happy with this so now have a way to prevent this happening.
It is a little complicated, but simply put, any loan over £5,000 that is repaid to the company cannot then be withdrawn again for at least 30 days, or else the additional withdrawal will just be seen as an extension of the original loan.
HMRC do monitor DLAs that a regularly overdrawn so it is important that you do too and ensure that any loans taken are by the book and taxed appropriately. If you are unsure about taking a loan, it is always advisable to consult your accountant.
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