A Director Loan Account (DLA) offers flexibility of withdrawing money from the business, as and when required. DLA reports all transactions between the company’s director and the company. Amounts payable by the director of a company should be recorded in the books as a credit transaction or vice-versa. In case of a close company (one that is controlled by five or fewer participators) any transaction between the company and director’s family, business partner and any person associated person needs to be recorded. Also, an overdrawn DLA cannot be avoided even if a person is connected with the director. Director Loan Account (DLA) is referred to an amount which a business owner, their spouse or family member get from the company that isn’t a reimbursement / salary or the capital employed in the company.
You can explore more at: What is Director Loan Account?
DLA is referred to all the records of any amount paid into or borrowed from the business. In case of an enquiry into a firm’s books of accounts, all HMRC staff is instructed to keep an eye on the director’s personal expenses. In cases of any discrepancy, a business is expected to produce all director loan records. As a business owner, in order to avoid any repercussion, it is essential to take in account any amount the company owes or vice versa at the end of a company’s financial year. An overdrawn DLA is not illegal – Companies Act 2006 has removed the prohibition on a company giving loans to directors. This rule has been reinstated by the requirement to get prior shareholder approval. However, there are few exceptions when members’ approval is not required. As a rule, shareholder approval is required for loans in excess of £10,000.0.
A limited company is separate from the owner and operates as a separate legal entity. Whatever profits the company makes goes into the company’s account and is not for personal use. Wages and dividends are the two ways by which an owner can take money out of a limited company. An owner can pay themselves any amount as wages. Owners tend to opt for a salary amount less than or equal to the National Insurance (NI) threshold level. At the end of a financial year, dividends are usually declared and a business owner can have access to money against the future dividends by way of DLA.
New DLA rules
- In the 2016 budget, the new measure was proclaimed and introduced through the Finance Act 2016
- Post 6 April 2016, tax payable on outstanding loans increased to 32.5% for advances, loans, and arrangements made on or after 6 April 2016
Taxation and Director’s Loans
If the DLA continues to remains overdrawn nine months post the company’s accounting period, Corporation Tax Act 2010, s455 provides for a taxation charge @25% on the lower limit of the amount outstanding at the end of the financial year and nine months post the year end. This amount is payable even if the business is making a loss and there is no corporation tax due. Once the loan is repaid the tax effect is NIL; s455 applies not only to a director’s loan account but to a loan to a participator of a close company. The personal and company’s tax responsibilities depends on, if the director’s loan account is overdrawn or is in credit.
DLA in debit
If a director’s loan is availed, the business owner or the company may have to pay tax. The tax responsibilities of the owner and the company depend on the way the loan amount is settled. Owners / businesses will also need to check if there are any additional tax obligations if:
- If the loan amount is in excess of £10,000: For loan amount is in excess of £10,000 during the year, a company is required to treat the loan as a Benefit in Kind and deduce class 1 National insurance (NI). Business owner must proclaim this amount on the self assessment tax return and might have to pay tax at the authorised rate of interest
- If actual interest amount is not paid to the company: The interest amount below the official rate must be recorded by the business and treat the discounted interest as a Benefit in Kind. The business owner might have to pay the tax difference between the official and the paid tax rate. This amount must also be reported on the Self assessment tax return
DLA in credit
A company is not legally responsible to pay corporation tax on the amount invested in the business by the owner. However, the company can pay interest to the business owner on the capital invested in the firm. This interest is subjected to income tax at a base rate of 20% and through form CT61* a company must report and pay income tax each quarter. On the other hand, this amount is treated as a business expense for the company and as a personal income for the owner / shareholder. The business owner must report this income on the self assessment tax return.
According to the Companies Act 2006, s413 provides information regarding any particulars of any credits / advances / loans granted by company to its directors. The details required include:
- information on the interest rate applicable
- amount of loan / credit approved during a financial year
- other important information and any amount written off or reimbursements, if any
Writing off a DLA
The company can write off a DLA – it must be formally waived as the liability will technically remain if the business just agrees not to pull together the outstanding balance. The amount written off is treated under Income Tax Act 2005 as a deemed dividend. Since it is a deemed dividend, the company is not required to have available profits for distribution. However, an important feature of a loan being written off is that – in most cases HMRC will question the decision about writing off a loan. For income tax purposes the amount is treated as dividend with the usual tax credit.
When a director borrows money from the company, good record keeping is important to make sure the right taxes are paid. The director should also be aware of the fact that if too much money is borrowed (which exceeds the company’s capacity to pay its creditors), the company might be forced into insolvency and the liquidator can take legal action.