Directors’ loan and current accounts
The terms “directors’ loan account “ and “directors’ current account” are used quite frequently by accountants, and are simply another form of terminology for money owed by you to the company, or the company to you.
When you first start trading through a Limited Company it is common for you to have a directors’ loan of £100, representing the value of the shares you now own. Holding shares in your own company is no different to holding shares in Apple or Tesco – you still have to pay for them (this is why you should think before setting up a company with a share capital of £10,000!)
After the initial share transaction there will be times when you buy things on behalf of the company and then repay yourself, or maybe borrow/loan money to the company. All of these are added together to form an overall balance – if you owe the company it is a directors’ Loan, and if the company owes you it is a Directors’ Current Account.
As well as intentionally borrowing money from the company you may end up with a Directors’ Loan if you overpay dividends – so you pay a dividend when the company does not have the profit to support it. The “illegal” dividend may be deemed to be a loan to you in order that the company can remain solvent. You then need to repay that dividend to the company, and until you do you will have a Directors’ Loan Account.
The main reason you need to be aware of Directors’ Loan Accounts is because there are tax implications that you should always keep in mind:
Any loan over £10,000 will be a benefit in kind, and you’ll pay tax on the deemed value of any interest you’ve saved by not going to a bank. This is the total value of money you owe the company, so if you take a loan of £10,000 and then overpay your wages by £2 then the loan is £10,002 and becomes taxable. There is no benefit in kind if you pay interest to the company at 3.25%.
Any loans outstanding at the balance sheet date (company yearend) have to be disclosed in the accounts and on the company tax return. If they are not repaid within 9 months of the year end then the company will pay extra Corporation Tax of 25% of the loan value. This extra 25% is repaid to the company by HMRC when you repay the loan to the company. If you’re intentionally taking a loan in order to avoid higher rate dividend tax, this extra CT evens the playing field!
You should avoid repaying a loan and then taking it out again soon after as it’s an obvious avoidance tactic HMRC call bed & breakfasting. They will see through it and tax it as if it had never been repaid.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.