Are you concerned about how to clear a director’s loan account that is overdrawn? Oliver Elliot can help you consider your options to resolve the matter.
Five simple ways to clear an overdrawn director’s loan account in most companies that are owner-managed businesses.
Dividends To Clear The Director’s Loan Account
You can vote a dividend. The liability that arises will be a credit to the director’s loan account. Provided the dividend is larger than the overdrawn balance then it will clear the overdrawn director’s loan account.
However, because dividends have strict rules to protect creditors, it is important that you ensure they are not unlawful dividends. A key question that needs to be asked about unlawful dividends is whether or not the company has sufficient distributable reserves.
It important that also when assessing the ability to declare a dividend the director has in mind that the company is not insolvent. If the company were to enter insolvent liquidation within 2 years of such a dividend, then it could be reclaimed by a liquidator as a Preference.
If the dividend is deemed unlawful or a preference, then it will have to be repaid.
Salary To Clear The Director’s Loan Account
In the same way as with dividends, you might be able to clear a director’s loan account by paying yourself extra salary as a bonus. However, this will be reported to HMRC under Real Time Information (“RTI”) that is provided to HMRC each month. PAYE and NIC will be payable on the salary, so the company should ensure that it has funds available to pay the tax.
The company should look to ensure that it is solvent and able to pay the tax. Otherwise, it is conceivable that a liquidator might later challenge the bonus payment as misfeasance and not in the best interests of the company.
If you have spent money on behalf of the company you can claim that provided you have retained evidence or can properly justify it. This could help you clear the director’s loan account.
Many directors incur expenses on behalf of a company but forget to claim them if they are considered trivial. Over time these mount up. However, you are perfectly entitled to claim them provided you are not claiming for periods when the accounts have already been filed and submitted to HMRC. If you try to claim for expenses in earlier periods then you will have to submit amended accounts and corporation tax returns which will conceivably open you up to the prospect of a tax enquiry. There are however time limits on your being able to amend such returns.
You can formally write off the balance due to the company. However, if you do this it will be treated as either dividends or salary depending on the structure of the company.
Repayment And Combinations
Lastly, you can simply repay the money to the company. However, there is nothing to stop you subject to the caveats combining dividends, salary, expense claims, some repayment and some write-off element to clear director’s loan account.
Disclaimer: this page is not legal advice and not to be relied upon as such. It is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.