Director’s loan accounts: Why now is the time to review your position

Director’s loan accounts (DLAs) are a common feature of many owner-managed and family companies, including incorporated farming businesses. However, they are an area attracting increasing attention from HM Revenue & Customs (HMRC).

With HMRC taking a closer look at loans between companies and their directors, now is a good time to make sure arrangements are properly managed, documented and reviewed.

A director’s loan account records money taken out of, or paid into, a company by a director outside of normal salary, dividends or expense repayments.

While these arrangements are common, issues can arise where loans remain outstanding for long periods or where repayments are made shortly before a deadline and funds are withdrawn again soon afterwards.

These arrangements, often referred to as “bed and breakfasting”, may be challenged by HMRC if repayments are not considered to be a genuine clearance of the loan balance.

Where a company makes a loan to a director or shareholder which remains outstanding more than nine months and one day after the company’s year-end, a tax charge may apply under Section 455 of the Corporation Tax Act 2010.

The current Section 455 charge is 35.75% of the outstanding loan balance and is payable by the company.

Although this tax can usually be reclaimed once the loan has been repaid, repayment can only be claimed after the end of the accounting period in which the loan is cleared. This means businesses can face a significant cashflow impact.

HMRC has recently changed its CT600A filing systems, meaning future anticipated repayment dates can no longer be included when filing a company tax return.

As a result, relief will generally only be available once a repayment has actually been made and can be evidenced.

This makes it increasingly important that director’s loan accounts are reviewed early, repayments are correctly planned, and records are maintained.

For farming families and rural businesses, structures can often include a combination of companies, partnerships and connected entities.

It is important to remember that director’s loan account rules can also apply where loans are made indirectly through related businesses (Partnerships/LLPS and sole trades). HMRC will consider the overall arrangements in place when reviewing whether the rules apply.

Additional tax considerations may arise where:

• a loan exceeds £10,000 at any point during the tax year; and
• interest has not been charged at HMRC’s official rate.

Simply adding interest to a director’s loan account may not always remove a potential benefit-in-kind or P11D reporting requirement, particularly where the interest has not been physically paid.

Director’s loan accounts are often viewed as a straightforward accounting matter, but they can create unexpected tax issues if they are not regularly reviewed.

By understanding your position early, you have more time to consider the options available, manage repayments effectively and reduce the risk of unexpected tax charges, interest, penalties or HMRC enquiries.

If you have an overdrawn director’s loan account, or you are unsure how the rules apply to your circumstances, please contact us or speak to your usual Old Mill adviser.