Director’s Loan Accounts – what are they, what are the risks, and should you consider one?31/08/2023
Directors may choose to lend to or borrow from their company. Loans between the director and the firm, are risky.
How DLAs work
The DLA’s primary function is to track financial transactions between the director and the firm. The account is considered overdrawn if a director withdraws more than their contribution to the firm. When, on the other hand, the firm owes the director more than it borrowed, the corporation is in credit.
What does it mean for tax and interest?
The interest rate applied to an overdrawn DLA is set by the company. However, if a director borrows money at a rate lower than HMRC’s official beneficial loan interest rate and the amount exceeds £10,000, the difference between the interest charged and the interest at the official rate will be a taxable benefit. This benefit in kind will need to be reported on annual P11D return. As well as the director being taxed on the benefit the company will also be subject to a national insurance liability on the benefit provided to the director.
There is also a corporation tax charge on the company if the loan remains in place for an extended period of time. When looking at a financial year, the company will be liable to a tax charge of 33.75% of any overdrawn loan account outstanding at the end of the financial year. However if the director has cleared the loan by the date this tax is due (nine months and one day after the end of the financial year) the liability is avoided. This charge does not apply to loans to directors who are full time employees and do not have a material interest in the company if the loan does not exceed £15,000.
It may also be agreed that interest should be applied to loans made by a director to a company. Such interest is an allowable expense for the company when determining taxable profits. The director will be liable to income tax on the interest they receive.
What are the legal implications of a DLA?
There are legal complexities associated with director’s loans. Companies are required by law to keep a DLA that details all financial transactions between the director and the company. This includes any personal costs paid for by the firm, cash withdrawals, and even corporate expenses that a director may opt to cover (this is seen as a director’s loan to the company). Directors are required to pay their debts to the firm regardless of the company’s financial situation. Should the company get into financial difficulties and a liquidator is appointed they will pursue the repayment of any overdrawn directors loan.
Is a DLA in your best interests?
The legal and taxation implications associated with a DLA means that you should always maintain comprehensive records and the advancement of substantial loans to directors should be considered and in conjunction with professional advice.
If you would like to learn more about DLAs, and discuss whether or not a director’s loan would be beneficial for you in your specific circumstances, you should contact JW Hinks on 0121 456 0190. Our friendly team of experts will help you to ensure you have considered all the pertinent information.