Directors loan account – balances outstanding to or from your company?

Your directors loan account balance could be taxable… read on for full details…

“A bank is a place that will lend you money if you can prove you don’t need it,” observed comedian Bob Hope. Most business owners will know exactly what he means. That’s why many of us have, at one time or another, lent our company money, or borrowed from it. These transactions are known as director’s loans and transacted through directors loan accounts.

I thought it would be helpful to talk through the tax implications of lending or borrowing from your company in this way.

Lending money to your company

In a nutshell, if you lend money to your company you need to be aware of these tax implications:

• Your company does not pay corporation tax on the money you lend.
• If your company pays interest on the loan, it will need to deduct income tax at 20% from the interest it pays you, and pay this tax over quarterly to HMRC. You also need to declare the interest received on your tax return. It’s worth noting that your company can obtain tax relief on the gross interest paid by claiming it as a business expense.

Borrowing money from your company or overdrawing your directors loan account

If you borrow money from your company, the tax consequences are rather more complicated. HMRC offers the following advice on its website, but I’d strongly recommend you talk to one of our tax accountants before you take any funds out of your company for personal use without deducting tax or NI.

1) If you borrowed more than £10,000

If you’re a shareholder and director and you owe your company more than £10,000 at any time in the year, your company must:

• Treat the loan as a ‘benefit in kind’
• Deduct Class 1 National Insurance

You also need to report the loan on your personal Self-Assessment Tax Return and you may have to pay tax based on the official rate of interest.

2) If you paid interest on the loan at below the official rate

If you’re a shareholder and director, your company must:

• Record interest you pay below the official rate as company income
• Treat the discounted interest as a ‘benefit in kind’

Again, you need to report the interest on your personal Self-Assessment Tax Return (SATR) and you may have to pay tax on the difference between the official rate and the rate you actually paid.

3) Corporation Tax

If your overdrawn director’s loan account has not been repaid by nine months and one day after the end of your accounting period, your company will have an additional corporation tax bill to pay.

However, when the loan is subsequently cleared, your company can reclaim the additional Corporation Tax it has paid. Unfortunately, you can’t reclaim any interest paid on the Corporation Tax.

If you have any questions at all about the tax implications of director’s loans, please get in touch, with offices in Chelmsford, Sutton, Wanstead and Saffron Walden. One of our tax specialists will be very happy to advise you.