Owning and running a business may sound like a straightforward task on paper, but once the ball is rolling many owners discover there is a lot more to understand than they initially predicted.
One of these things is the director’s loan account (DLA).
While a DLA won’t set your pulse racing, understanding the ins and outs of this topic will keep you on the right side of the law and open your eyes to the tax obligations that go hand-in-hand with this element of a limited company.
Our team of tax experts have broken down everything you need to know about a director’s loan account below.
For those who own a limited company, the money in their business bank account doesn’t belong to the owner, as such, but it can be acquired through a director’s loan account.
Money from the company that is neither a salary, dividend or expense repayment, or money the owner has paid/loaned to the company, is deemed a director’s loan by HMRC.
So if you take money out for any other reason than above, the amount must be recorded in your personal DLA.
At the end of your company’s financial year, depending on your activity, you’ll either owe the company money or the company will owe you money.
This is subsequently recorded in the balance sheet of your statutory accounts.
DLA’s are generally comprised of two forms of transactions - (i) cash withdrawals from the company as a director, and (ii) personal expenses paid with either the company’s money or card.
Business expenses are any expenses that are incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
Anything other than that is defined as a personal expense.
Your director’s loan account needs to contain evidence of all transactions involving your personal finances, as well as your company’s, to satisfy HMRC’s strict examination.
There are many reasons why you might need to take a loan from your company. You could need a roof repaired after a bad storm, or to pay your child’s school fees for the year.
Regardless of the reason, it’s vital to remember the loan hasn’t been subject to personal or company tax and HMRC will, therefore, come calling for what it’s owed.
If your director’s loan account is overdrawn at the date of your company’s year-end, you may be liable to pay tax. Generally, an overdue DLA will be taxed at the 32.5% rate of Corporation Tax.
However, if you pay back the entirety of the loan within nine months of the company’s year-end, you aren’t liable to pay a penny of tax.
In other words, if you took a loan in March 2018 and your company year end is April 2018, the loan must be paid back by February 2019.
If you owe your company over £10,000 (interest-free) at any given time, the loan is classed as a benefit in kind and you’ll need to record it on a P11D, as it’ll be liable to both personal and company tax.
You’ll also need to pay Class 1A National Insurance at the 13.8% rate on the full amount.
Your company doesn’t pay any Corporation Tax on money you personally lend it and you can withdraw the full amount from the company at any time.
If you charge any interest, this will be classed as a business expense for your company and personal income for you.
The interest amount must be declared as income on your Self Assessment and taxed accordingly.
The government has introduced measures to stop directors managing their DLAs in a way that can be manipulated for tax avoidance.
The measures stop directors from repaying their borrowed money to a company before the year-end to avoid penalties, only to take it out again immediately without any intention of repaying the loan.
When a loan in excess of £10,000 is repaid by the director, no further loan over this amount can be withdrawn within 30 days.
Furthermore, any director’s loan over £15,000 loses its tax relief if there is any future intention to withdraw money.
Intentions can be interpreted by analysing patterns of repeated withdrawals or similar sums being withdrawn.