Directors’ loan accounts and Corporation Tax implications

Directors' loan accounts and Corporation Tax implications

The director’s loan account is the amount paid to director other than salary and dividend, it can be

  •  cash payments other than your salary or dividend
  •  expenses that you may have paid for using company funds that are actually for personal use
  •  money is withdrawn for your personal use – for example, to renovate your home, pay school fees or personal Income Tax

It is common that directors lend the amount to the company, this has no tax implication and director can take the money back at any time.

During a period, the company lends money to director and director also lends money to the company, then the net position will be considered. If the amount is in overdrawn position i.e. company has net receivable amount from the director, it will be considered as director loan which needs to be cleared within 9 months of your corporation tax accounting period otherwise this will have tax implications.

This is different from being self-employment where all of the money belongs to the business owner therefore there is no tax implication on the amount withdrawn from the business.

The following are not generally considered to be the director’s loans for HMRC Corporation Tax purposes:

  • certain small loans made to participators who are full-time working directors who do not have a material interest in the company
  • loans made to participators for the supply of goods or services in the ordinary course of business, providing that your company doesn’t give more than 6 months credit or longer credit than it would normally give to customers

A director’s loan can be repaid by:

  • putting money into the company’s bank account
  • the company crediting the director’s loan account with a payment – for example, a dividend, salary or bonus

A director’s loan can also be considered repaid if the loan is:

  • released by the company in a formal contractual procedure
  • written off by the company where the company accepts that a loan (usually to a former director) cannot be recovered, and has given up trying to get it repaid

Tax Implications:

If the director pays off the balance before the last day of the accounting period, the company does not need to pay tax on it; also it does not need to be disclosed in company’s tax return. However, if the director takes out the loan again within 30 days of the year-end or director has an arrangement with the company for further loan and arrangement existed at the time of repayment before year-end, its details will need to be included in company’s tax return.

If the directors’ loan account is overdrawn after the last day of company’s corporation tax accounting period but the director repays in full within the 9 months, the company does not need to pay tax on it however its details will be included in a company tax return. The company will need to pay tax on the amount of the director takes loan again within the 30 days of the repayment or has an arrangement with the company for further loan and arrangement exists at the time of repayment.

If any of the above situations requires the company to pay tax, it will be included in a corporation tax return and tax will be paid @ 25% of the loan amount.

Claiming relief after your directors’ loan has been repaid:

When you pay off a director’s loan on which your company has paid Corporation Tax, your company can reclaim that amount of Corporation Tax paid. HMRC calls this ‘claiming relief from the tax paid’. The claim must be made within 4 years from the end of the financial year in which the loan is repaid.

Treatment of director’s loan account sometimes can be tricky and require professional advice, if you have any question or require any accounting or taxation help, or tax computation or tax return, please feel free to CONTACT US. BNW Accountants is a team of expert accountants and tax specialists. We are in your easy reach, Redhill Accountants, Crawley Accountants, Surrey Accountants, Sussex Accountants, Croydon Accountants, London Accountants.

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