A director’s loan account (DLA) is the record of transactions between a company and its directors, excluding salary, expense repayments and dividends.
When directors lend the company money, for instance; to fund daily trading activities and purchase assets, the director becomes a creditor of the company. Typically, directors start DLAs when they provide start up capital for their company.
When a director borrows money from the company, this is known as a ‘overdrawn director’s loan’. In such a scenario, the director is a debtor of the company and expects repayment in the future.
The problem with DLA's is when the account becomes overdrawn and you cannot afford to repay it
The money a director takes out of a company (not dividends or salaries), which exceeds the value of the money which they have put in to the company, is classed as a taxable benefit for them . Only when the loan is repaid, is the DLA disregarded as a company asset, until then, the company should keep note of this asset.
When the loan is repaid within nine months and one day of the company’s year-end, it is likely that their will be no impact for the director or company. It is when the director is unable to pay in this time and the amount borrowed is £10,000 (or more!) that issues accumulate.
Overdue payments on director’s loans mean the company has an additional 32.5% Corporation Tax to pay, on the amount outstanding. This extra 32.5% is repayable to the company by HMRC once the loan is repaid to the company by the director. If you do not repay your director’s loan, instead, this may turn into a 32.5% personal tax cost – not repaid by HMRC once the loan is repaid.
Tips:
- As a director, do not borrow more than £10,000 from the company unless you have shareholder approval – anything over £10,000 in value, is not interest free!
- Once money is taken out of a company by a director, document it so that you prevent borrowing spiralling out of control and having no plan or structure to repay the loan
- Include the figures in the annual accounts of the balance sheet
- If you have an overdrawn director’s loan account and/or your company is struggling financially, contact us today. We can offer you friendly, expert advice to help you deal with this account and find a solution.
See more information on Directors Loan Accounts here
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