| An overdrawn directors loan account (DLA) is when a director of a company withdraws more money from the company’s funds than they have repaid or than they are owed by the company. Essentially, the director owes money to the company, creating a liability on the company’s balance sheet. From our experience we see this happen a lot when directors withdraw most of the money from the bank account, and haven’t accounted for depreciation and the corporation tax that will be due which reduces the profit available in the company. If there is retained profit in the business at the year end then a dividend can be declared which can clear the DLA and all is good, however it becomes more of an issue when there are not profits available for distributions. There are some key things that you need to be aware of if you do have an overdrawn DLA. What is a directors loan account? A director’s loan account tracks the financial transactions between the director and the company, including any withdrawals or repayments. If the withdrawals exceed the repayments or amounts owed to the director, the account becomes overdrawn. Money that directors take out of the business is usually posted here, this is then offset with amounts the business owes the director, or dividends declared by the business. What does it mean if the DLA is overdrawn The director is essentially borrowing money from the company. This borrowed amount needs to be repaid to the company (within 9 months of the year end to avoid HMRC charges). Tax Implications There are specific tax implications for overdrawn DLAs. If a director’s loan exceeds a certain amount and is not repaid within nine months after the company’s financial year-end, the company will incur a tax charge. This tax charge can be reclaimed from HMRC when the loan is fully repaid by the company.Additionally, there might be benefits-in-kind implications if the loan exceeds a certain threshold, requiring the company to report and potentially pay tax on the benefit provided to the director. |
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| Legal and Compliance Issues There can be legal consequences if the company becomes insolvent and the director owes a substantial amount. Creditors may demand repayment from the director. Interest and Repayment Companies should charge interest on overdrawn DLAs, and this interest should be at a commercial rate to avoid further tax complications. HMRC publishes specific rates to use for DLAs that is sees as a commercial rate that means it doesnt need to be counted as a benefit in kind. Directors are expected to repay the overdrawn amount, within 9 months of the year end, to avoid penalties or additional taxes. Strategies for Management Directors should closely monitor their loan account to avoid it becoming overdrawn. Regular repayments and maintaining a clear record of transactions can help in managing the account effectively. While it can be tempting and sometimes even necessary to withdraw all the money in a business it is worth being aware of the problems that can arise and to have a plan in place for paying it back before HMRC hits you with tax charges for this. This is why we always suggest you save your tax in a different account, its harder to overpay yourself when the money isn’t easily available. |
