Directors’ Loans
If you are running a Limited Company, there are numerous tax legislation that you will need to be aware of. Admittedly, such topics are often boring, but sadly they are also very important for your business!
One such piece of tax legislation is Directors Loans Accounts (DLA). To help you better understand what DLA is and involves, we have put together the following information, including what you are required to do and what your tax obligations are. Not only will this give you a clearer understanding of everything involved, but it will hopefully also enable you to avoid some of the pitfalls that can lead to unintentional illicit activity.
What is a Directors’ Loan?
Whilst the money in your Limited Company bank account is not legally seen as being yours, you can access this money through what is called a Director’s Loan (DLA). HMRC classes a DLA as money taken out for anything other than a salary, divided or expenses repayment, as well as any money you have paid into or loaned the company. Therefore, if you wish to take out money from your business account for a reason other than those mentioned above, it must be recorded as a personal DLA. If you do take money out for a DLA, the total amount must be carefully recorded so that at the end of the financial year, it can be clearly calculated as to whether you owe your company money, or it owes you money. If you owe money, it must be recorded as a liability in your annual accounts.
Directors’ loan content
There are a number of things that you will need to include in your Director’s Loan account. This includes all cash withdrawals you make as a Director, as well as any personal expenses that you paid using company cash or a company credit card. If you are unsure as to what classes as a business expense or not, a simple rule to remember is that business expenses are ONLY those that occur because of the duties of employment. Therefore, any expense that is not wholly related to your duties is considered a personal expense. It should be obvious, but to be clear, a Director’s loan can only be taken out by someone who is a recognised Director of the company.
As a Director, your DLA must include all of your personal financial transactions, as well as those of your business. This is done to allow HMRC to check for any irregularities between the two and means you must ensure to keep accurate records of everything you spend. This is, of course, difficult and can lead to problems; therefore, HMRC keeps your DLA under review for the entire duration of the tax year to ensure all rules and guidelines are adhered to.
Why take out a Directors’ loan?
There are of course numerous reasons why you may suddenly find yourself needing to take out a Director’s loan. From covering a sudden repair bill for your home to even getting the money for a new car, Director’s loans are taken out for a large number of reasons. However, you must remember that you will not have paid either company tax or personal tax on this loan and HMRC is not going to allow you to avoid this.
Repaying a Directors’ loan
You are of course advised to repay any Director’s loan as quickly as possible to avoid any problems in the future, however, there are a few guidelines that you can follow to ensure you do not fall foul of any penalties. If you repay back your loan within 9-months of the company’s year-end, you will not be required to pay any tax on the loan. For example, if you take out a loan in January and your company Year-End is February, you will need to repay the loan in full by November of that year. Should you fail to repay the loan in full in this period, you will be required to pay 32% Corporation Tax on the amount you borrowed.
Owing money to your company
If you owe your company more than £10,000 (interest-free) this is then classed as a ‘Benefit in Kind’ and as such must be recorded in a P11D Form, and on which you will be required to pay both personal and company tax. You will also need to pay National Insurance at the Class 1A rate of 13.8% on the total amount you owe to your company.
Company owing you money
If you lend money to your business, for any reason, your company will not be required to pay any Corporation Tax on this loan. However, if you charge your company interest on this loan, the loan will then be considered a ‘Business Expense’ for your company and a ‘Personal Income’ for you. As such, any interest earned must be declared as income on your Self-Assessment form, and again on which you will be taxed.
Avoiding paying tax on Directors’ loans
The government has introduced various regulations to prevent people from abusing the DLA system. For example, some directors were avoiding tax by repaying their loan before the Year-End and then taking it out again immediately afterwards – continuing to do this with the intention of never really paying back the money. Termed ‘Bed & Breakfasting’, the government has now ruled that when a loan of £10,000 or more is repaid, the Director cannot take out another loan of this amount or more for the next 30-days. If as a Director you did this, any amount over the £10,000 will be taxed.
All Directors’ Loans are monitored
Directors’ Loans are heavily monitored to avoid abuse of the system and prevent people from being regularly overdrawn. It should also be noted that HMRC has the power to declare any such loans as a salary – therefore making them open to Income Tax and National Insurance payments.
