Overdrawn directors’ loan accounts- everything you need to know

An overdrawn director’s loan account is a loan that has not been repaid. This particular money drawn by the director is not classified as salary or dividends. These overdrawn amounts are termed ‘assets’ as long as they are not returned. Often loans to the directors or other employees are used for remuneration arrangements. In simple words, we can say that a director’s loan account keeps the record of the company’s financial transactions with the director and their details other than salary dividends. Keeping track of the money and accounting is important to avoid delays in repayments, as it cannot exceed 9 months.
It needs to be carefully regulated and managed as there are various tax issues related to it that can cause trouble in the future. The case of paying back the loan just to borrow again can cause havoc in the company, and it is termed as ‘bed and breakfasting. This activity is not ent=ertsined by HRMC.

Points of concern

Which transactions need to be recorded?

In the case of a close company, any privately made payments to the director, his family, or friends may need to be recorded. A close company refers to one that five or a few directors control. 

In the case of two directors

When the company has two directors, and one owes the money, it becomes important for the directors’ and the company to do everything in a detailed manner under proper documentation.

Detailed analysis and record keeping are essential to enlist everything, even the interest on directors’ overdrawn loan accounts.

Tax implications

If the director’s loan account remains unpaid for more than 9 months, then section 455 Corporation tax Act 2010 adds a tax charge at the rate of 35% on the amount outstanding at the year-end and 9 months after the year-end. This has to be understood that this amount is payable even if the company faces a loss. Whatever tax is payable under section 455 is temporary and can be repaid to the company by the HMRC after the nine months of the accounting period.

Writing off the loan

The company can write off directors’ loans overdrawn. It is treated as a deemed dividend under Act 2005. As it is a dividend amount, it necessarily does not require to be distributed among shareholders. One of the most striking features of a loan written off is that it comes under the definition of ‘emoluments from an office or employment’ that will result in the step seeking to collect Class 1 NIC from the company.

In case of liquidation

The liquidators can put up demands like repayment of the money owed to the company to make payment o the creditors of the company, in case of overdrawn directors’ loan account liquidation. There can be chances of legal action by the liquidator if need be.

Final takeaway

While taking loans, it becomes very important for the directors to be careful and keep the records maintained. Borrowing too much money from the company can be dangerous, so always consider the requirement and take this particular action. Overdrawn director’s loan account is other than salary and needs to be repaid, making it a very cautionary action. The official interest rate at present is 2% on such loans as declared by HMRC. it is also mandatory for the director to report their self-assessment tax return, and the tax has to be repaid on the basis of the difference between the interest paid and the official interest rate.