Guide to Directors Loan Account & Its Tax Implications
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What is a Directors Loan Account (DLA)?
A DLA is a ledger that helps keep track of all transactions between the director and the company.
Directors may sometimes take money out of the business or put money back in to pay for day-to-day business expenses. These transactions are recorded here, and when a director pays for a business expense out of their pocket, it can be recorded here too.
Transactions like salary or dividends would usually not be recorded in DLA because they are usually recorded in separate ledgers.
The main goal of DLA is to keep an accurate accounting record of the transactions between the director and the business as a creditor or debtor to comply with HMRC.
The company will also pay for the director’s personal expenses, which will be added to the balance of DLA.
If the business is close (A limited company with five or fewer ‘participants’* is known as a close company), any “private” payments that the company makes to a director’s family, friends, or anybody else linked to the director may need to be recorded in DLA.
* A participator is someone who is a director as well as a shareholder in the company.
What Does a Debit or Credit DLA Mean?
- Debit balance = the director, is in debt to the business and is a debtor.
- Credit balance = the business owes the director money, and the director is a creditor.
DLA Tax Implications
There are tax implications involved with a director’s loan account; these implications differ if:
- You owe the company money
- The company owes you money
Tax Avoidance – HMRC rules:
- Once the director returns a loan over £10,000, no future loans over £10,000 may be taken within 30 days. If this happens, the whole loan balance will be taxed.
- Loans received outside of the 30 days may still be taxed, particularly if they exceed £15,000:
The laws state that if a director borrows more than £15,000 and proposes to borrow more than £5,000 in the future that is not matched by another repayment, the Bed and Breakfast limits will apply.
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‘Bed and Breakfasting’
‘Bed and Breakfasting’ refers to a situation in which a director’s loan is utilised to avoid paying taxes.
Bed and Breakfasting occur when a director repays a loan in full before the conclusion of the fiscal year to avoid fines, only to acquire another loan never to repay it.
Can a DLA Be Written Off?
The business may write off a loan made to a director. However, the amount written off is classified as a presumed dividend under the Income Tax (Trading and Other Income) Act 2005.
The loan amount must be reported in the director’s self-assessment tax return in a designated box on the ‘extra information page.’ The loan amount written off will not qualify for corporate tax reduction.
What if the company is closing down/ liquidated with a large DLA balance in debit?
During the business’s liquidation, the director may be required to return the money owed to the firm to satisfy the company’s creditors. If the director fails to repay the money owed to the firm, they may be sued or declared bankrupt.
The implications of inaccurate records
Inaccurate records may cause the director’s personal costs to be wrongly reported as allowed expenses, leading to tax underpayment.
In contrast, directors’ justified business expenses may not be claimed, resulting in an overpayment of taxes.
When a company director borrows £10,000 or more, the loan must be approved by the shareholders, who may not be the same people running the company.
Conclusion
The DLA is a tool for keeping track of director transactions with the company. It may be handy and convenient, and it eliminates the need for the director to keep track of individual transactions involving cash in and cash out of the business.
However, you should be mindful of stringent HMRC requirements and tax ramifications since it might be expensive if loans are not paid promptly; therefore, you should keep tabs on your directors’ loan account.
Using cloud-based accounting software, you and your accountant may quickly review your financial status and make any necessary adjustments.
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