Director Loan Accounts
A director’s loan account (DLA) comprises a debt owed by the director to a company. It is money taken from the company by a director that cannot be classed as salary, dividends or repayment of some other monies owed to the director. Subject to agreement to the contrary, a director’s loan can be called in at any time. Directors’ loans often come to the fore when directors fall out (and one director wants the other director to settle his debt) or when the company enters insolvency.
In the event of non-payment of a director’s loan on demand, it may be necessary to commence formal steps for recovery. In an insolvency process, an overdrawn DLA is considered a company asset and the officeholder will pursue the loan account for the benefit of the company’s creditors.
JMW has experience in negotiating and entering into settlements between directors and officeholders in regards to DLAs, as well as bringing and defending claims in relation to DLAs. To speak to a solicitor for legal advice and representation, contact us on 0345 872 6666, or fill in our online enquiry form to request a call back.
How JMW Can Help
Issues revolving around director loan accounts, particularly those involving a company entering into insolvency, can be complicated. Therefore, it is crucial you get the best possible advice and guidance on the key issues at an early point in time so a strategy can be developed to achieve its best outcome.
JMW regularly advises directors on their rights and options, and can help defend claims brought by officeholders. We pride ourselves on providing cost-effective and efficient services, ensuring that a difficult situation is resolved without unnecessary delay.
What is a Director’s Loan?
A director’s loan is money withdrawn from a company’s accounts that isn’t a salary, dividend or expense repayment, or money that has previously been paid into or loaned to the company. If a company has more than one director, each director must have their own DLA.
Transactions that should be recorded in a DLA include any cash withdrawals from the company that a director has made, and any personal expenses that were paid with company money or credit cards.
Director’s loans are typically used to cover short-term or one-off expenses, such as unexpected charges. They are administratively heavy and come with risks, including the potential for hefty tax penalties, so they should not be used routinely, just as an emergency source of funds.
FAQs About Director Loan Accounts
Is there a limit to how much can be borrowed in a director’s loan?
There is no legal limit on how much a director can borrow from their company; however, consideration should be given to how much the company can afford to lend, and how long it can manage without this money.
Director’s loans of £10,000 or more will be automatically treated as a ‘benefit in kind’ and must be reported on a self-assessment tax return.
When does a director’s loan need to be repaid?
A director’s loan must be repaid within nine months of the company’s year-end. If a loan is not repaid in this time, a significant tax penalty may be imposed. Any unpaid balance following the repayment period will be subject to a 32.5 per cent corporation tax charge. The corporation tax paid can be reclaimed upon repayment; however, this can be a lengthy process and interest paid is not recoverable.
Can another director’s loan be taken out straight after another one?
A minimum of 30 days must pass between the repayment of one director’s loan and the taking of another. Some directors try to avoid the tax penalties by paying off the loan just before the repayment deadline before taking out another one. However, HMRC calls this ‘bed and breakfasting’ and is considered to be tax avoidance.
Talk to Us
If you need help negotiating a settlement in relation to a DLA, contact JMW today by calling 0345 872 6666. Alternatively, fill in our online enquiry form and we will get back to you.
