In the second of our blog series focusing on the ‘All You Need to Know About…’ various different elements of running your own business, today we are going to be looking at the Director’s Loan Account (DLA). What it is, when you may have one, and the implications of it.
What is the DLA?
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 and, as the name suggests, can only be utilised by the company director.
A debit DLA
If you withdraw money from your company that isn’t either salary, dividend or reimbursement of such expenses, it will be treated as a loan to the director and allocated to the DLA accordingly (a debit to the DLA). 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. Equally, if you overpay yourself dividends in the company year (i.e. you withdraw more than is available as profit), these will also need to be moved to the DLA, as it is illegal to file accounts with overpaid dividends.
A credit DLA
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 capital introduced to the business when you first set it up, or further down the line, will also be treated as money that the company owes you.
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.
Tax implications on a debit DLA
Whether you have a DLA in debit due to overpaid salary/expenses/dividends, 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.
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- trust us!).
- 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 (15.05% in 22/23) will be payable when the P11d is prepared.
Beware of Bed and Breakfasting
‘Bed & 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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