Overdrawn directors’ loans
An overdrawn Director’s Loan Account is created when a director (or other close family members) 'borrows' money from their company. Many companies, particularly 'close' private companies, pay the personal expenses of directors using company funds. Where these payments do not form part of a director’s remuneration, they are usually posted to the Director’s Loan Account (DLA).
The DLA can represent cash drawn by a director as well as other drawings by a director (including personal bills paid by the company). Whilst it is quite common for small company accounts to show an overdrawn position on a DLA, this can create unwelcome tax and NIC consequences for both the company and the director. The rules are further complicated if the loan is for more than £10,000 and the loan must be reported on the director’s personal Self-Assessment tax return. There are also further Income Tax costs if the loan is written off or 'released' (not repaid) by the company.
Where certain DLA's are not paid off within nine months and one day of the company's year-end, there is an additional Corporation Tax (CT) bill of 32.5% of the outstanding amount. In most cases, this is not a permanent loss of revenue for the company as a claim can be made to have this CT refunded (but not interest) when the loan is paid back to the company. The claim to have the tax refunded needs to be made within 4 years after the end of the year in which the participator's loan was repaid.
The CT, Income Tax and National Insurance impacts of using a DLA must be carefully considered to ascertain if this is an efficient way for a director to ‘borrow’ money from their company.
Source: HM Revenue & Customs | 08-10-2019