If you are a director of a small or medium-sized limited company in the UK, you may have heard about a Director's Loan Account (DLA). But do you know what it is and how it affects your company's tax liabilities? In this insight, we will explore all the key aspects of a Director's Loan Account, so you have a clear understanding of its implications on your business and your tax responsibilities.
Firstly, let's define what a Director's Loan Account means. A Director's Loan Account is essentially a way for directors to withdraw money from their company, besides their salary or dividends, without incurring personal tax. It is essentially a running balance of all the money that a director borrows from or lends to their company. The Director's Loan Account isn't uncommon with many SME companies utilising it at some point or another.
However, it's important to note that the DLA comes with certain regulations. If the company does not adhere to these regulations, then there might be tax implications. If a director takes more money out of their company’s bank account than they have invested, then HMRC will consider it a 'benefit-in-kind' and will tax it accordingly. Essentially, the company should only lend funds to its director up to the amount the director has previously put in as a debtor to prevent this.
Secondly, if the director owes more money to the company than they have lent, then there will also be tax implications on this. The debit balance of the DLA can be taxed; if it does not reduce to less than £10,000 at any point during the financial year or is not repaid within nine months of the company year-end (known as an 'overdrawn director's loan account'). If this is the case, then the company pays additional tax s.455 tax at a rate of 33.75% of the debt. this can be reclaimed once the debt is repaid but will harm the company cashflow.
Thirdly, the transaction type also has an impact on the tax related to the DLA account. If the director borrows money from the company with interest and this is charged at the official rate, there will be no tax implications. On the other hand, if the interest is charged at a lower rate, or no interest is charged and the loan is significant, then this can potentially be considered as a benefit-in-kind. This means that the director will be taxed on this loan at their marginal rate.
Fourthly, if a director owes money to their company via the Director’s Loan Account and the company is insolvent, then the funds will be treated as those belonging to the company and will need to be paid into the company’s creditors' account (clawback).
Lastly, the DLA doesn't only refer to withdrawals. It also applies when directors invest additional funds into their company, referred to as a 'credit balance'. This kind of Director's Loan Account flows as usual but will not incur any tax as it will only reflect the funds paid into the company.
A Director's Loan Account can be a useful tool and financial strategy for small and medium-sized limited companies' directors. However, it is important to follow the regulations related to it to ensure there are no tax implications. There are certain milestones, interest rates, and withdrawal limits that need to be met when dealing with Director's Loan Account transactions, which we've covered in this blog post. It's always recommended to speak with an accountant who has expertise on the subject to keep on top of everything.
