We’ve already explored what a director’s loan account is, and how they can be used to cover emergency expenses. We also looked at the tax aspects, specifically the fact that should your company year-end come around with you still owing money to your director’s loan account and you are unable to pay it within nine months then you will be liable for Corporation Tax at the prevailing rate.
What’s more, if you owe your company more than £10,000 net of interest at any point, then the loan will be classed as a benefit in kind which must be recorded on a form P11D. Both company and personal tax, plus National Insurance, will be payable at the prevailing rates.
What is an overdrawn director’s loan account?
An overdrawn director’s loan account comes about when you take money out of the company outside of your salary or dividends and the amount exceeds what you have put into the company. It is not illegal to have an overdrawn account, providing you keep records of all transfers, and the amounts are repaid within nine months of the company year end.
However, where these amounts are not repaid in full, and the sums involved are in excess of £10,000, HMRC may consider that you have effectively been taking money from the company as income, in which case, as detailed above, the relevant taxes will be due.
Overdrawn director’s loans can become complex, especially where a company is insolvent.
In insolvency, liquidators will investigate whether the director’s loan account is overdrawn. If it is, then it would be considered a company asset that would be pursued, especially if the balance was significant.
Directors in such situations will probably wonder whether a director’s loan account can be written off if it is overdrawn, especially if they are experiencing financial difficulties and have no way of repaying it.
Overdrawn director’s loan accounts and insolvency
Around 75 to 80 per cent of insolvency cases related to financial problems involve an overdrawn director’s loan account. It is not uncommon for directors to take funds from a company when it is doing well, only to run into issues when there is a downturn in profits. The company needs its money back, but the director doesn’t have the personal funds to repay it. What to do? This will depend upon the value of the loan, how much is owed to creditors and the liquidator’s view on whether the director should be pursued.
Whilst a company can effectively ‘write-off’ a loan, a liquidator would be likely to reverse the action and require the director to repay what is owed so that the creditors can be paid. If this is not possible, then it is likely that the director will have to enter into a personal insolvency procedure such as bankruptcy.
If the amount owed is small and the liquidator considers it minor enough, then it may be written off with the view of the liquidator being that there are insufficient assets to enter into a formal liquidation process. Instead it may seek to have the company struck off the Companies House register.
There is the possibility of reducing the amounts owed to a director’s loan account by making valid expense claims.
Managing a director’s loan account
The overriding message here is to ensure that a director’s loan account is managed efficiently. Keeping track of amounts withdrawn and being aware of limits and the fact that the loan will need to be repaid eventually are all vital.
If you are finding it difficult to manage the day to day running of your accounts and it is a challenge to keep track of things like withdrawals from your company, you may benefit from the help of a qualified bookkeeper.
At Office Assistants we help limited companies keep on top of everything to do with company finances, from ensuring returns and payments are made on time, to managing cashflow and payroll.
If you would like to find out more about how we can assist your business, you are welcome to get in touch.