Directors’ Loan Accounts – what are they and what implications do they have?

If you are a director in a company then chances are you have heard Directors’ Loan Accounts or their acronym “DLA” mentioned.  In this blog post we explain what they are, how they can arise, and the implications they can have. 

What are Directors’ Loan Accounts (DLA)?

There will be occasions where either a Director incurs an expense on behalf of the company, or the company pays a personal expense of the Director.  In such circumstances a Directors’ Loan Account will be used to record the transaction.  This can happen multiple times over the course of a financial year, and so the DLA will usually have a running balance which represents either the money the company owes the Director, or the balance which the Director owes back to the company. 

Are there implications to having a Directors’ Loan Account balance?

If the loan balance is in credit, i.e. the business owes the Director money, then the Director can be repaid without any tax implications for the Director.  For example, if the Director bought a new printer for £200 for the company and paid for it on their personal credit card, then they can be repaid without tax falling due on them as they are only being put back into the position they started in. 

If the loan balance is overdrawn, i.e. the Director owes the business money, then there are possible implications. 

What are the implications of an overdrawn Directors’ Loan Account?

If the Director owes the company money then the following should be noted; 

  • If the balance on the loan goes over £10,000 then either interest should be charged on the loan at a minimum rate of HMRC’s beneficial loan interest rate at the time, or the loan reflected as a benefit in kind and reported on form P11D. 
  • If the loan is still outstanding at the company’s financial year end, then it will need to be reported on the company’s corporation tax return.  If the loan is not repaid within nine months and one day of the financial year end, then monies of 33.75% of the loan balance is paid across to HMRC.  This is called Section 455 or s455 for short. It is held by HMRC and only repaid to the company nine months and one day after the end of the financial year in which the loan is repaid by the Director. 
  • Should the company go into liquidation then any outstanding loan balance will be recalled by the liquidators in the same way as any other debtor of the company. 

Can Directors’ Loan Accounts be offset?

If for example a husband has an overdrawn loan account and his wife, who is also a Director, is owed money by the company then the two can be offset however there must be a formal agreement in writing to do so. 

Is there anything else to consider?

It’s not just Directors who can be caught under these elements.  For example, an employee would also be subject to a benefit in kind if they had a loan balance over £10,000 and interest not charged or charged below the beneficial loan interest rate set by HMRC.  If that employee held 5% or more of the issued share capital, or was a close family member of a Director or someone holding that level of shares then it could also be caught under s455.  

Conclusion

In their simplest form a Directors’ Loan Account can have the appearance of a simple expenses account, however they can quickly become subject to additional regulation.  S455 can be seen sometimes as simply an inconvenience as opposed to a tax due to the fact the company ultimately will get the money back once the loan is repaid, you have to consider this cash will be tied up with HMRC for a minimum of one year.  Therefore careful planning needs to occur to ensure the company is operating efficiently within these rules.  If your company has Directors’ Loan Accounts and you would like to discuss these, as experienced tax advisors we would be happy to chat with you.  Fill out the form on our contact us page and we will be in touch very soon.