Guide a Director's Loan Account (DLA)
The Director's Loan Account (DLA) is a useful, misunderstood and tax-sensitive accounting technique. Small business owners either like it or loath it.
Many business owners like the DLA because it offers flexibility for withdrawing money from the company, as and when required. It is essential for a Director
to understand how such withdrawals interact with Salaries and Dividends
There are a few restrictions and potential tax aspects, and also disclosure issues for the published accounts.
Accountants find the DLA to be a very useful tool for dealing with certain business transactions, some of which are described below. The DLA is frequently used by accountants to 'mop up' some of the Directors' transactions.
It is not necessary for a business to have a DLA. The easiest way to avoid the need for a DLA is for the Director(s) to withdraw in money their exact salary, dividends and expense claims, at the time. Whilst this seems obvious, it is frequently not the normal practice in many single Shareholder
/Director companies as described below.
Uses for a Director's Loan Account
These are typical examples the use of a DLA:
If a Director puts money into a company, particulary when a new company is formed. As the money is credited to the DLA it is potentially repayable at a future date, depending on the other DLA transactions.
Lump Sum Withdrawals
If a Director prefers to take lump sums from the business, as and when required. This is accounted for by "topping up" the DLA with net salary and dividend; then the lump sum withdrawals are deducted from this. The DLA therefore runs a balance, either in credit (good) or overdrawn (with potential tax complications).
This method has the added advantage of setting the salary at a tax optimum level, eg. to take advantage of personal allowances, and allow the owner / directors to actually keep their money in the business.
Director Pays Privately For a Business Transaction
For example, sometimes a Director needs to use a private credit card to finance a business purchase. This can be resolved by making an expense claim which is credited (added to) the DLA for repayment at a later date. This helps if the Director does not require an immediate reimbursement.
The Wrong Debit / Credit Card Used
Occasionally a Director accidentally uses a business card for a personal transaction (eg. in a shop). This is resolved by deducting the amount from the DLA. It is necessary to record it at the time, even if the Director subsequently repays it at a later date.
If a Director makes a payment through the business which is not a business expense, an accountant will frequently adjust the transaction to the DLA when the accounts are reviewed, rather than suggest a repayment.
Tax Issues Affecting the DLA
There are some serious tax implications for the DLA - but only when the DLA is 'overdrawn'
. A DLA is typically overdrawn when a Director has taken more money out of the company than the combined total of salary, dividends and expense claims.
If the amount is small and short term there are no tax consequences, here are the figures:
Tax on Interest Free Loans / Benefit in Kind
A 'beneficial loan'
, (ie. over £10,000, and where interest is nil or below the interest rate set by HMRC) is taxed on the Director as a Benefit In Kind (BIK)
. The company also has to pay Class 1A National Insurance. Note that the £10,000 level applies from UK Tax Year 2015/2016 onwards, previously this was £5,000.
If the Director pays interest
on a loan over £10,000, at (at least) an interest rate set by HMRC, then there is no taxable Benefit In Kind on the Director.
Beneficial loans must be declared on form P11D
as a chargeable benefit
Loans Not Repaid
If a Director's loan (of any amount) is not repaid 9 months after an accounting year end, the company is required to pay tax at 25% of the unpaid amount (s455 CTA 2010). This additional charge is paid along with the company's Corporation Tax
bill. This charge also applies to loans made to connected people including spouse, civil partner or other relatives of a Director.
This tax is repayable to the company if and when the loan is repaid. The tax is repaid 9 months after the end of the accounting year in which the loan was repaid. Part loan repayments get a proportionate refund.
There are also rules against 'bed and breakfasting', eg. repaying just before the year end and taking out the loan again with days (CTM61615). There are also special rules which apply if loans are written off, and we recommend a company to get specialist tax advice on this.
First In First Out (FIFO)
The FIFO rule for a DLA allows that a repayment be matched to the earliest outstanding debt (unless other rules apply). This is from 'Clayton's case' (CT61605).
Compliance and Legal Issues
Shareholder approval is needed for loans over £10,000 (£50,000 for a loan is to meet a legitimate business need). An ordinary resolution is preferable, recording the amount and purpose. Other commentators have suggested that a more general approval is given, and minuted, which states that all withdrawals are loans unless otherwise described.
A Director's contract of employment, and the company's Memorandum and Articles of Association, should also allow for Director's loans.
Small Companies (but not Micro Entities) must disclose (s413 CA 2006) in a 'Note to the Accounts' any loans to Directors (ie. overdrawn DLAs), even if the loan was repaid. Technically every transaction should be listed which resulted in the overdrawn DLA, the date of repayment and any interest paid. In reality, similar transactions are grouped together to keep the Note relatively short, and HMRC may request more details if they so require.
These webpages are intended to provide a helpful general guide, but specific professional advice should be taken before relying on it to take action.
Further Specialist Advice
For advice on more complex tax matters contact Paul Eaves on 01704 548698 or Email Paul Eaves
or visit the website Eaves and Co
HMRC directors' loan accounts toolkit
Expenses and benefits: loans provided to employees
Rates and allowances: beneficial loan arrangements - HMRC official rates