A director’s loan that has yet to be repaid is referred to as an overdrawn director’s loan account. Limited company directors frequently withdraw funds from the company in ways other than dividends or salaries. If they do, any funds they receive are regarded as loans from the company to the director and, like all loans, must be paid back.
The director’s loan account records all DRAWINGS transactions, excluding salary and dividends, between the director and the company. This account must be reconciled and settled after each fiscal year to avoid additional tax obligations.
This is acceptable, provided that a profit is made and corporation tax is paid before dividends are distributed to pay off the loan. The result is that the director owes the company money as a loan known as an Overdrawn Director’s Loan Account if the company struggles and is not profitable and thus unable to pay dividends to shareholders.
Can We Offset an Overdrawn DLA?
There may be times when a company has two directors (like a husband and wife), and one owes money to the company, and the company owes the other money. To compensate for these balances, the directors must agree in writing (and keep the right paperwork) before any offsetting can happen.
What Are the Tax Consequences of a Director’s Loan Account That Is Overdrawn?
You owe the business money if your director’s loan account is overdrawn. You have nine months from the end of the accounting period to pay back the loan. If you don’t, the limited company will be charged a 32.5 per cent of the amount corporation overdrawn director’s loan tax penalty.
HMRC will assume that the director has been taking more money out of their company as income if the actual amount is more than £10,000 and the loan has no interest or is charged at less than commercial rates. As a result, the director and the company will also be affected by income tax and social security. Until the corporation tax assessed on the loan or the director’s loan account is repaid, HMRC will also charge the company interest on the loan.
What Happens if a Director’s Loan Account Is Overdrawn in Insolvency and They Can’t Repay?
Operating an overdrawn directors’ loan account interest during insolvency and the company’s liquidation can put you in a complicated financial situation.
In the end, the liquidator or CVA supervisor appointed in the event that a company experiences some form of insolvency will seek to recover the debt on behalf of the creditors.
Options exist in such situations, such as:
- Full repayment of the director’s loan over time
- Compensation for any loans the directors may have made to the business (this is called set-off)
- Taking your full salary while lowering the amount of money you withdraw from the company to pay off the loan account gradually. Pay yourself £4,000 a month, but only take home £1,000; make sure to pay tax on the £4,000.
- Increase profits in upcoming periods to enable dividend payments.
What Happens to the Overdrawn DLA if the Company Liquidates?
The director may be required to pay back any money owed to the company so that the liquidator can pay the company’s creditors. The overdrawn directors’ loan account liquidation faces legal repercussions from the liquidator or even becoming bankrupt.
In conclusion, accurate record-keeping is crucial when a director borrows money from the business to ensure the proper taxes are paid. The director should be aware that if the company borrows excessive amounts of money and cannot pay its creditors, it may be forced into liquidation. The liquidator may sue the director to enforce the debt.