DIRECTOR LOAN ACCOUNT- WHY IT MATTERS?
It is essentially important to understand the nature of the Director Loan Account (DLA), how it works and its concomitant factors. One must keep a record of any money owed or paid into the company.
What is Director Loan Account?
When a director (or other close family members) owe money from the company not classified as below:
- a salary, dividend or expense repayment
- the money you’ve previously paid into or loaned the company
You are supposed to repay the loan amount within 9 months of the end of your Corporation Tax accounting period. Both the director and company (if the director is both a participator as well as director) may have to pay tax if director’s loan account is overdrawn. As a director, you may also incur extra tax responsibilities if:
- the loan was more than £10,000 (£5,000 in 2013-14)
- you paid your company interest on the loan below the official rate
If the director being a shareholder owe more than £10,000 (£5,000 in 2013-14) to the company, the company must:
- treat the loan as “benefit in kind”
- deduct Class 1 National Insurance
Apart from this director must report the loan amount on Self-Assessment tax return and may have to pay the tax on the difference between the official rate and the actual rate paid.
- If a loan repaid within 9 months of the end of Corporation Tax accounting period:
The Company is required to use form CT600A while preparing Corporation Tax Return if director is a shareholder as well. If the loan amount exceeds £5,000 and director availed another loan of £5,000 or more up to 30 days before or after loan repaid, S455 charge is calculated and corporation tax to be paid at 32.5% of the original loan or 25% if the loan was taken before 6 April 2016. You can reclaim the Corporation Tax once the original loan is completely repaid, but not the interest paid on it.
- If a loan is not repaid within 9 months of the end of Corporation Tax accounting period:
Use form CT600A to show the amount owed at the end of the accounting period. Corporation Tax to be repaid at 32.5% of the outstanding amount or 25% in case the loan was availed before 6 April 2016. The interest rate on this Corporation Tax will be added until it’s paid or loan is repaid. However, Corporation Tax can be reclaimed, but not the interest.
- The loan is ‘written off’ or released, not repaid:
A company must deduct Class1 National Insurance through the company’s payroll. The director in such a case is bounded to pay Income Tax on the loan through Self-Assessment tax return.
Reclaiming the Tax
- Within 2 years
Form CT600A can be used if you’re reclaiming within 2 years while filing the corporate tax return. Use form L2P with your company tax return if either:
- Tax return is for a different accounting period than the one when the loan was taken out
- You are amending your tax return in writing
- After 2 years
Fill form L2P and either include it with your latest Company Tax Return or post it separately.
HMRC will either repay your company by using the details mentioned in your latest Corporation Tax Return or sending a cheque to your company’s registered office address.