If you operate your business as a sole trader, Directors loan account isn’t something you need to worry about. If you are a limited company director and shareholder then a directors loan account can be a bit of a headache. That’s because a limited company is a separate legal entity. This means you can lend it money and borrow from it, albeit HMRC would prefer you don’t borrow. The following government link gives more details. Below is a summary of the main points
If you have lent money to the company you can withdraw the entire amount without any tax implications. If you owe the company money there may be tax implications for both the director and the company
An overdrawn director’s loan account is effectively an interest free loan made to directors. The company must show all overdrawn accounts in its accounts and tax return.
Your company and personal responsibilities are as follows:
Overall, the key is to keep timely, accurate records and to keep the transactions relating to each of the directors separate. Poor record keeping could result in misallocation of expenses/payments. As well the incorrect amount of tax being paid. The company must disclose the amount of all director’s loan account, with the largest balance being stated. Ensuring that a balance that starts below and above £10,000 are stated.
Proper record keeping ensures that interested parties and lenders can see how responsible company directors are being. We advise all our clients to use a cloud based accounting system with a number of add-ons that allow you to keep an electronic copy of paperwork relating to transactions.
The best way to deal with a director’s loan account will depend on the numbers. In this case the tax and cash flow implication to the company and individual director. Contact us to see how we can mitigate your tax and improve your cash flow.
Finance Equation Ltd are multi-award-winning Chartered Certified Accountants providing cutting-edge expert services to individuals, property investors, businesses and contractors. We specialise in serving small, medium and large companies. We understand our clients’ needs and are passionate about providing the right advice and expertise to save you money.
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The Finance Equation Ltd is a company registered in England & Wales. Company number 05116983.
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