Consequences of overdrawn Director’s Loan Accounts

1st November 2017

 

Most people who form a limited company understand that it is a separate legal entity, many however, especially those who previously traded in an unincorporated form, do not fully appreciate what this means in respect of taking money out of the company.

In a sole trader situation the proprietor is free to withdraw money from the business as he/she wishes, however this is not the case with a company.

Where a director withdraws funds from a company in excess of their remuneration (normally salary and/or dividends) these withdrawals are set against any balance owing to the director (perhaps money loaned to the company to cover start up costs, or undrawn dividends, for example).

Where there is an insufficient balance available to cover these withdrawals, this creates an overdrawn loan account situation, and potentially two tax issues:

 

  1. S455 tax

Where a close company Director’s Loan Account remains overdrawn at the year end, and the balance is not repaid to the company within nine months, the company will be subjected to tax at 32.5% on the amount outstanding.

This tax is repayable once the loan has been cleared, however repayment is not always quick. The due date for repayment is nine months and one day after the end of the year in which the loan was repaid. Dependant on the timing of the loan repayment, this could mean a delay of around twenty one months before the tax is due for repayment.

 

  1. Benefit in kind

Where an overdrawn loan account exists, unless the director is charged interest or the loan is provided for a qualifying purpose, if the loan exceeds £10,000 at any point during a tax year, the company must report the value of the ‘benefit ‘, calculated as defined by HM Revenue & customs, on a P11D form.

The company will be charged Class 1a National Insurance at 13.8%, and the director will suffer tax between 20% and 45% (dependant on their tax band) on the value of the benefit.

One final point to note is that overdrawn Director’s Loan Accounts must be disclosed in the company’s accounts that are filed at Companies House, and the details are therefore available for public viewing.

With planning the above pitfalls can often be avoided.



 
Other items in Blogs
 
Jason Jones
30th July 2018 Tax Rules on Holiday Homes

So, you enjoyed your break in a holiday cottage to the extent that you’re considering investing to make money from a similar property of your own. Jason Jones has this advice because a Furnished Holiday Let is a special type of property business where very different tax rules apply.   These Lets can be seen…

Read More »

Ben Kilby
23rd July 2018 MTD for VAT – FARMPLAN READY!

As of 18 July 2018, HMRC has issued a list of software suppliers supporting Making Tax Digital for VAT. Amongst the list is Farmplan, the only agricultural software supplier. Farmplan has met the criteria HMRC have stipulated for Beta testing. It shows that Farmplan is committed to providing software that is compatible for MTD for…

Read More »

James Cater
29th June 2018 Understanding Tax Relief Restrictions

Although we hear of decline in the value of development land, particularly for larger developments, growing houses continues to be more attractive to many than growing crops. Onerous Section 102 levies may apply but the tax regime remains gentle. It should not however be assumed that tax reliefs will be available automatically. Legislation imposes qualifying…

Read More »

Vanessa Pearson
28th June 2018 Career Change? Think Contracting.

There are many benefits over employment, writes Whiting & Partners Contract Specialist, Vanessa Pearson   Changing careers can be a challenge but leaving the employment wage treadmill to become a contractor can increase your earnings, saving on tax and national insurance as well as providing more flexible working hours. Contractors are essentially self-employed individuals who…

Read More »

Daniel Coleman
28th June 2018 Making Tax Digital – Moving Your Company Forward

You, like many businesses have been successfully running for years, maintaining your books and records and submitting correct VAT returns, in turn ticking all the necessary boxes and satisfying HMRC. However, the introduction of MTD will mean a ‘shake up’ to your current methods and may require you to adopt software for the first time.…

Read More »

Philip Peters
28th June 2018 Trading Allowances Change

Do you remember when eBay first emerged and become a revolutionary trading platform for buying or selling and, yes, turning a profit? As social-media has expanded, so have trading websites to the extent that there’s hardly a town, village or group that does not have a ‘buy’n sell’ page.   HM Revenue & Customs have…

Read More »