Implications of an overdrawn Director’s Loan Account
Whether a company is in financial difficulty, or not, directors should take time to understand the potential implications of having an overdrawn loan account. This is an important issue which can often be overlooked until it is too late.
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 – this principle applies to every withdrawal.
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 are likely to arise if the company becomes insolvent.
Tax implications of an overdrawn 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.
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 are transparent from the outset of our discussions.
What happens if I cannot repay my loan account?
If there are genuine reasons as to why a loan account cannot be repaid, then it is possible for the balance to be written off. However, this is not without repercussions.
HMRC recently set out a new process to enable a targeted approach to the issue of overdrawn loan accounts in insolvency processes. This new process specifically applies in cases where the loans are written off during the administration or liquidation.
In such cases HMRC will then require the director to pay income tax on the loan through their Self Assessment tax return for the relevant period.
How can we as Insolvency Practitioners in Birmingham and London help?
Keywood Group is a firm of Licenced 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 licenced and regulated by The Insolvency Practitioners Association.
We pride ourselves on providing you with clear advice from the outset so that you can make decisions relating to your company in full possession of the facts. If your company is facing financial difficulty, you should take action as early as possible to prevent the position from becoming worse.
If you have any queries, please contact us for a no obligation chat.
