During the lockdown many of you with limited companies may have resorted to withdrawing funds from your company bank accounts over and above any normal salary and/or dividend payment taken in the past. This may have been withdrawn as a loan as opposed to a salary or dividend payment.
Below is a guide to help explain the consequences of taking a ‘loan’ from your company and what is known as the Director’s Loan Account ("DLA").
Although your company is owned and controlled by you, legally and for tax purposes it is a separate legal entity. This is important and it is because of this separate legal status and the control you exert over it that HMRC has safeguards to ensure that the funds held and owned by the company are afforded safeguards.
The Revenue pays particular attention to the DLA.
A DLA can sometimes be referred to as a Directors Current Account ('DCA'). This directors loan/current account represents monies owing to you or monies owing back to the company from you. If you borrow money from your company (instead of say declaring a dividend) then assuming the company didn't already owe the same amount of money to you, then this would show within your company accounts as a directors loan account.
Financial year end
When it comes to the financial year end an account is drawn up internally within the financial records showing the movements of any payments into the company by you and any expenses of the company that have been paid by you personally. Offset against this are any withdrawals you have made which were not a salary, dividend, or reimbursement of business expenses that you paid personally.
If the company owes you money then from the point of view of HMRC there are no tax consequences. It can be withdrawn with no tax to pay.
However, if you decide to charge your company interest then the company would receive tax relief on the interest charged but you may incur tax on the interest received. Not many people charge their company’s interest on money owed to them due to the level of other income they receive.
However, if you owe the company money at the year-end then there can be tax consequences.
Tax Consequences of an Overdrawn Directors Loan Account
If you pay the entire loan back to the company within 9 months and one day after the end of the accounting period then the company should not have any additional tax to pay on that loan. For example, if your company accounting year-end is 31 March and you borrow £100,000 from your company on 1 April 2021, that loan would need to be repaid in one form or another by 1 January 2023. However, HMRC will expect the company to charge you a notional amount of interest that needs to be included as income within the company accounts and can have the consequence of marginally increasing your indebtedness to the company.
The official rate set by HMRC is currently 2.25% per annum calculated on a daily basis.
If the loan from the company to you is not repaid in one form or another within 9 months and one day then HMRC will charge additional tax on that loan at 32.5%. The additional corporation tax is known as Section 455 tax. This tax is the same rate as that for a higher rate tax payer and is designed to stop tax payers taking loans every year instead of dividends.
The Revenue will still expect the company to charge you interest and additional reporting by way of P11D for PAYE purposes.
The additional corporation tax paid at 32.5% will be repaid to the company by HMRC once the loan has been repaid in one form or another but there is a delay as this would be repayable 9 months and 1 day after the accounting year in which the loan is repaid. So for example, if a loan is fully repaid on 1 April 2021, and the accounting year end is 31 March 2022, HMRC will repay the tax after 1 January 2023 following a claim for repayment.
Repaying an Overdrawn DLA
In many cases where there is an overdrawn director’s loan account and when cash is not readily available to repay it, the overdrawn loan can be cleared by voting a dividend which you do not subsequently withdraw. When a dividend is declared but not taken, it is credited to your directors loan account thereby reducing an overdrawn directors loan account balance or creating a balance owed to you.
The dividend can be voted before the year end to avoid an overdrawn DLA to be shown within your end of year accounts or it can be declared after the year end.
Income tax on the dividend will be payable in the tax year when the dividend is voted. This can be outside of the financial year end.
For the unwary this can cause a spike in the following January tax payment but can be useful tax planning in certain cases.
Repeated Overdrawn Directors Loan Accounts
The Revenue pays particular attention to the timing and reasons for an overdrawn DLA which is repaid and then within a short period is overdrawn again.
This is particularly relevant in respect of the 9 month rule and any new loan taken within 30 days of repaying the original. This can be treated as tax avoidance on the basis that the Revenue treats it as the same loan just ‘bed and breakfasted’.
So for example, it isn't possible to repay the loan just before the year end and withdraw the money again a couple of days into the new accounting period.
Overdrawn DLA – Problems
In some unfortunate circumstances the overdrawn DLA cannot be repaid by cash or by dividends. It may be that the company has insufficient capital reserves to declare a dividend large enough to clear the directors loan account and as a consequence it may be necessary to leave part of the loan outstanding still with the associated Section 455 tax payable.
The other issue with an overdrawn DLA is a matrimonial dispute and who is and who is not responsible for either all or part of the overdrawn DLA. The spouse may be a director and shareholder and has little interest apart from receiving a salary and or dividends and until there is a break up may be blissfully unaware of an overdrawn DLA and the consequences arising thereon
DLA – Assistance
The use of a Directors Loan Account can be helpful in respect of tax planning, both in respect of how much tax is due but also potentially deferring some personal tax payments to a future tax year which may be helpful. If during the lockdown and with restrictions as to the availability to practice within the private hospitals you feel that you may have extracted more funds from your company than in previous years then please do not hesitate to get in contact.
We can help.