Overdrawn Director's Loan Account | Director's Guide
A director of a company can either lend or borrow money to the business through a director’s loan account (DLA). Any money taken from the company – which isn’t a dividend or salary – is considered a loan from the business which will need to be repaid.
When a DLA is overdrawn, there are many complex considerations to consider: legality, tax, and what happens if the company goes into insolvency. In this guide, we’ll be explaining all the ins and outs of overdrawn director’s loan accounts in simple terms.
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Are Director’s Loan Accounts Legal?
Yes – ever since the Companies Act 2006 came into effect, it has been perfectly legal for directors to take money out of their business. Before this, companies were prohibited from providing loans to directors.
However, there are stipulations to keep in mind. Directors can’t just take out funds from the company without following certain rules.
If a director wants to withdraw some money from the company, it must be approved by a resolution of the company’s members. The members must be made aware of:
- The nature of the transaction
- The total amount of the loan
- Why the loan is needed
While you can borrow any amount you’d like from the company, you shouldn’t borrow more than the company can realistically afford. This could result in accusations of misfeasance, as it can be seen as negligent towards the business and its creditors.
Tax Implications
Overdrawn director’s loan accounts are a bit of a minefield when it comes to tax. You may find yourself having to pay lots of income tax, or your business might be hit with a corporation tax penalty. The tax implications vary depending on your situation.
If You’ve Not Repaid Your Loan within the 9-month Deadline
You can get this tax refunded once you’ve repaid the loan, but repayment is usually deferred to the next accounting period, which can leave you waiting for a long time.
If You’ve Taken Out a Large, Interest-Free Loan
Most of the time when directors take out loans, they do so without interest. If the amount they take out is over £10,000, however, HMRC will view it as a beneficial income loan. This is known as a “Benefit in Kind”.
Your company will have to complete a P11D form and deduct the appropriate Class 1 National Insurance amount. You will also need to declare the income on your self-assessment tax return and pay income tax on the amount.
If You’ve Been Taking Out Frequent Loans
Once you take out a director’s loan, you must wait at least 30 days before taking out another one. This is to prevent what is known as “bed and breakfasting”. Bed and breakfasting is where directors avoid tax on their loans by repeatedly taking money in and out of the company to avoid tax deadlines.
If you violate the 30-day rule, HMRC will charge income tax and National Insurance on the amount. They may potentially apply tax penalties too.
Overdrawn Director’s Loan Accounts in Insolvency
When your company enters into insolvency, it’s the job of the liquidator to repay the creditors as much as possible. They’ll look to sell all assets and collect all debts owed to the company – this includes any outstanding director’s loans.
It isn’t unusual for directors of insolvent companies to have overdrawn director’s loan accounts. In fact, most insolvent company directors do. In some cases, this isn’t a huge problem; the amount might not be considered worth pursuing and will then be written off by the liquidator as a result.
However, if it’s a large outstanding amount, the liquidator may be compelled to recover it. If you can’t afford to repay the DLA, this can have some major implications. You might have to declare personal bankruptcy and surrender your own assets as repayment.
How Can I Repay an Overdrawn Director’s Loan Account?
There are many ways to repay a director’s loan account. Obviously you could just repay the amount out of your personal funds, but what other options are there? The answer depends on the financial situation of your company.
Company Dividends
You can pay off your DLA using company dividends. If you declare a dividend but don’t receive it, it will be credited to your director’s loan account. Depending on the size of the dividend, this may be enough to repay the amount entirely.
However – you should be careful when doing this. If the dividend was made within 2 years of the company going insolvent, it could be viewed as a preferential creditor payment, allowing it to be pursued by the liquidator. Paying yourself a dividend beyond the company’s appropriate reserves – known as an illegal dividend – will result in the excess amount having to be repaid.
Both of these actions could potentially result in accusations of misfeasance or wrongful trading.
Extra Salary
You can increase your salary to help pay towards the amount. HMRC will need to be made aware of the raise, and the appropriate PAYE and NIC must be paid.
The company must have enough funds to justify the raise or you could be found liable for misfeasance, as you’re not acting in the company’s interest.
Claim Expenses
A lot of the time when we pay money into the company, we don’t formally declare it. The odd bit of cash here and there doesn’t seem worth the hassle. However, the company technically owes all of these expenses to you, and collectively they can add up to a significant sum. This can then be credited to your director’s loan account.
Write Off the Loan
You can formally write off the company’s entitlement to the loan. The company’s members must resolve to waive the amount, typically by voting to declare it as a dividend.
If your company is insolvent or is approaching insolvency, however, you should be careful. Writing off a loan may be seen as an effort to divert funds away from creditors, which can result in accusations of misfeasance or wrongful trading. Additionally, a liquidator can easily reinstate a director’s loan if they think it’s appropriate.
Speak to an Expert Today
If you’re struggling with an overdrawn director’s loan account, you speak to an insolvency practitioner as soon as possible.
Inaction could result in personal liability for debts, and even personal insolvency. Our expert team can help to ensure you’re protected legally and financially.
Get in touch to book a free, no-obligation consultation today.
