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Are you overdrawn on your Directors’ Loan Account?

A Director’s Loan Account is a record of transactions between a Director and the company. It may incorporate dividends and salary when they are unpaid or partly paid to record the liability due to the Director, less any payments made by the company. An Overdrawn Director’s Loan Account with a company is in effect the same idea as being overdrawn with the bank. The difference is that instead of owing the bank, you owe the company. It is literally as simple as that.

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  • Orderly dealing of company’s affairs.
  • Helping you deal with the overdrawn account.
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Directors’ Loan Account: Frequently Asked Questions

Is A Director’s Loan Account A Loan?

Although it is called a Director’s Loan Account and although it may incorporate loans either from the company to the Director or alternatively from the Director to the company, it is not a traditional loan. There will frequently be no loan documentation and many Director’s Loan Accounts operate without the provision of any interest payable by either the Director or the Company.

How Does The Account Operate?

Typically a Director’s Loan Account will simply be a ledger showing on the credit side all the payments made to or on behalf of the company by Director and on the debit side all the payments that have been made by the company to or on behalf of the Director. The balance of the debits and the credits determines who owes whom the balance at a given point in time.

Do I need to pay Tax on the loan account?

If you have an Overdrawn Director’s Loan balance the company may have to pay tax on it. It is deemed as a distribution ie. instead of dividends or salary. The tax you might have to pay, particularly if your Overdrawn Director’s Loan Account is not repaid within nine months of the company year end date is known as Section 455 corporation tax. The tax rate is 32.5% of the loan account balance that is overdrawn. If the Overdrawn Director’s Loan Account is repaid by the Director to the company, then the Section 455 corporation tax will be repaid by HMRC to the company.

If the sum involved is more than £10,000 and the loan is interest free or is charged at less than normal commercial rates, HMRC will consider that the director has been taking money out of their company as in effect income. As such, there will also be income tax and national insurance consequences for the director and the company. HMRC will charge the company interest on the loan until a point where the corporation tax levied on the loan or the director’s loan account is repaid.

How Is An Overdrawn Director’s Loan Account Addressed On Insolvency?

Sometimes a company will try to reduce or clear the director’s loan account by voting the balance as a bonus or dividend. However, if the company enters an insolvent liquidation, it could cause the company and the director a problem.

It is the liquidator’s role is to realise all the money that’s owed to the company and recover its assets. The liquidator will usually view an Overdrawn Director’s Loan Account to be an asset they should realise for the benefit of the company’s creditors. Just as Director Duties apply to Directors to act in the best interests of the company, Liquidator Duties apply to the liquidator to act in the best interest of the company and its creditors.

In that situation, the liquidator will take action to recover the director’s loan, which could conceivably lead to legal proceedings to recover the funds and this could culminate in the director going into personal bankruptcy.

From the company director’s point of view, if the company is forced into liquidation by a creditor such as a supplier or HMRC, the liquidator may look at the circumstances in which the Overdrawn Director’s Loan Account was created. The effect of liquidation could lead to suggestions of wrongful trading and/or misfeasance against the director.

Could An Overdrawn Director’s Loan Account Be Written Off?

There may be instances where an Overdrawn Director’s Loan balance can be reduced. For example, if the director’s personal funds have been deployed for the benefit of the company.

In certain circumstances, an Overdrawn Director’s Loan Account can be written off. In a ‘close company’, a director’s loan may be written off if that director is also a shareholder. In that scenario, the writing off of the Overdrawn Director’s Loan Account will be treated as a dividend.

However, if the director is not a shareholder in the ‘close company’, then the Overdrawn Director’s Loan will instead be taxed as in effect salary.

However, in a liquidation situation, the liquidator has a duty to realise all the assets, not merely the assets that the Director wants them to deal with. As a result this can lead to the director being pursued by the liquidator for the Overdrawn Director’s Loan Account, even in circumstances when such a debt may have historically been written off.