Directors’ Loan Accounts – Avoiding the Pitfalls
At Keywood Group we always recommend that any director of a limited company should be aware of the company’s financial position at all times. In particular, it is important to monitor transactions between the company, and themselves, taking time to fully understand what a director loan account is.
In April 2023 JMBJ Limited, a company operated by Coronation Street actress Beverley Callard went into voluntary liquidation with £114K owing to the company in director loans. Recently, Sway And Starting Limited, a company operated by former SAS: Who Dares Wins frontman Ant Middleton, went into voluntary liquidation with Middleton having an overdrawn loan account of £2.7M.
What is a director loan account?
A director loan is essentially money which a director withdraws from the company that cannot be classified as their salary, an expense, or the repayment of monies previously loaned to the company. Amounts due to a director from the company will be recorded in the accounts as a creditor, whereas amounts due from a director to the company will be recorded as a debtor.
The Companies Act 2006 provides that details of any advance granted by the company to its directors are recorded. Details must include the amount of the loan granted during the year, an indication of the interest rate, its main condition and details of any sums repaid or written off. In the notes to the accounts must also be stated the total amount of the loan and the total amount of interest charged.
Where a director is also a shareholder, they may also receive regular dividends, in anticipation of there being sufficient profit at the financial year end. This is common, but it is not advisable because issues can arise if the company becomes insolvent and close attention has not been to the loan account transactions.
Is tax payable on a director loan account?
Having an overdrawn loan account is not necessarily a problem, as long as the balance of the loan is repaid within nine months of the end of the accounting period. Difficulties arise when a director’s loan is not repaid within nine months of the year end, or the business finds itself in financial difficulty.
Any loan of £10,000 or more must attract interest charged at the equivalent of HMRC’s official interest rate (or more). If not, the discount granted will automatically be treated as a ‘benefit in kind’ which has tax implications for both the company and the director. You can find helpful information at https://www.gov.uk/directors-loans.
For tailored advice, you should speak to an independent tax advisor.
How is an overdrawn loan account dealt with if your company is insolvent?
An overdrawn loan account represents monies due to a company. It will be noted as an asset of the company for the purpose of preparing a statement of assets and liabilities, in all types of insolvencies, and must be repaid.
An Insolvency Practitioner, acting as an Administrator or Liquidator is required to collect in all monies owing to the insolvent company and must pursue repayment of the loan account. At Keywood Group, we will work with directors who find themselves with an overdrawn loan account in order to reach a sensible outcome. This could mean reaching an agreement to settle the balance owed for a reduced sum, but this will depend entirely on your personal financial position and we pride ourselves on being full transparent from the start.
How can we as Insolvency Practitioners in Birmingham and London help?
Keywood Group is a firm of Licensed Insolvency Practitioners with offices in Birmingham and London, although we cover the whole of England and Wales. Our friendly team has over 20 years’ experience dealing with businesses and our Insolvency Practitioner is fully Licensed and regulated by The Insolvency Practitioners Association.
If your company is facing financial difficulty, you should act as early as possible to prevent the position from becoming worse. If you have any queries, please contact us for a no obligation chat.
