A director’s loan account (DLA) is a record of transactions between a company and its directors aside from the salary and dividends. If you are a company director, you may have a director’s loan.
In some cases, a director may lend the company money to fund day-to-day trading and the purchase of assets as an alternative to investing the money in share capital. In this situation, the director is a creditor of the company.
If a director borrows from the company, this is often referred to as an ‘overdrawn director’s loan’. In this situation, the director is a debtor of the company and at some point that money should be repaid.
DLA’s can become complex and usually come under scrutiny from shareholders and potentially, creditors as well if it is overdrawn. Having a DLA in itself is not usually a problem; issues start to arise when the account becomes overdrawn, and you cannot afford to repay it.
Any money a director takes out of a company which is not classed as a dividend or salary, and exceeds the value of the money you have put into the company, is classed as a taxable benefit for the director. Until the loan is repaid, the DLA will be considered a company asset so the director and the company should keep track of it.
If the loan is repaid or offset within nine months of the company’s year-end, then it is likely to have no impact on director or company. However, if the director is unable to pay in this time and/or the amount borrowed is £10,000 or more then problems may start to arise.
In particular, HMRC will view the DLA as an interest-free loan which you have benefited from and you will be expected to pay income tax on this. Since the Companies Act 2006 became law, it is no longer illegal to have an overdrawn DLA but it can easily become a problem.
As a result, directors shouldn’t borrow more than £10,000 from the company unless they have approval from all of the shareholders. Of course, in many small companies the directors are also the shareholders.
Once a director takes money out of a company, it should be well-documented to prevent borrowing from spiralling out of control without any plan or structure to repay the loan.
If you have an overdrawn director’s loan account and/or your business is struggling financially, get in touch with us on 0800 901 2475 as soon as possible. Our friendly, confidential advisers will be able provide you with all the advice you need to deal with this account and find the solution to your business’ problems.