Directors’ Loan Accounts

Director's Loan Accounts: understanding the implications

As an accountant, I am intrigued by the government’s bizarre treatment of directors’ loan accounts. HMRC’s rules are very complex, which is incredible seeing as the rules apply to how a director can use his or her own money! But rules are rules, and whatever we may think about them, we have no choice but to graciously accept and follow them.

I would strongly request everyone reads the HMRC toolkit on directors’ loan accounts. It’s extensive but very well explained. Here’s the link.

There are two implications for directors’ loan accounts that stand out:

1. Implications of benefit-in-kind
2. Implications of Section 455 Corporation Tax

Implications of benefit-in-kind

In technical terms, if a director’s loan account is overdrawn by more than £5,000 even for a day during the accounting period, then the company needs to calculate the benefit of the loan account to the director and submit a P11d return. I suggest that you watch out for this: review the director’s loan account when you’re finalising the accounts.

However, in practical terms, if the director’s loan account is not overdrawn by more than £5,000 at the end of the year and there is evidence that it will be settled by the revenue from dividends anyway, HMRC may take a softer approach, but technically, they can demand you submit a P11d return.

My suggestion is this: keep an eye on the director’s loan account throughout the year and review it when you finalise the accounts. If you notice at any time during the year that the loan account is overdrawn by more than £5,000, calculate the interest, and debit the director’s account. If you do this you will avoid any hassle of the P11d return, the reporting of which would only put an added burden on the company.

THE DNS approach to directors’ loan accounts

Calculate the commercial interest payable by the director and debit the director’s account. This avoids having to submit a P11d return, thus reducing the burden of reporting. Note that if the balance is less than £5,000 you do not need to worry about the P11d implications, nor will there be an interest calculation to do for the director.

Implications of Corporation Tax

If the director’s loan account is overdrawn at the end of the year and not settled within nine months of the end of the accounting period, tax of 25% is payable as per Section 455 of the Corporation Tax Act 2010. I would suggest, therefore, that wherever the director’s loan account is overdrawn, avoid submission of the Corporation Tax return until the overdrawn account is settled. This avoids having to make a claim for a tax refund under Section 420 of the Income and Corporation Tax Act 1988 in the next Corporation Tax return.

If the overdrawn director’s account is settled, you need to show that it is under Section 420 of the Corporation Tax computation. In cases where the director’s loan account has not been settled at the time of submitting the Corporation Tax return and beyond that to nine months after the accounting period, then you should show the tax payable under Section 455 of the Corporation Tax Act.

THE DNS approach to directors’ loan accounts

If the director’s loan account not overdrawn, DNS can submit a Corporation Tax return without any problem. Where the director’s loan account is overdrawn, the director must settle the debt and retain proof of the settlement. This allows DNS to make a claim for tax relief under Section 420 and the company will avoid paying any tax.

A word of warning

Make sure that after settlement, the director’s loan account is not overdrawn consistently. Directors should not aim to settle the overdrawn director’s account temporarily they should aim at settling it permanently. If directors are seen to overdraw again soon after settlement, tax under Section 455 might still be payable.

I very much hope this guidance has been of help you to you. There’s information about directors’ duties and plenty more tax tips and articles on our website.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.