What is a director’s 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.
Where a director is also a shareholder of the company they may also receive regular payments as dividends, in anticipation of there being sufficient profit at the financial year end. This is not unusual, but issues can arise if the company becomes insolvent and the director has not paid close attention to the loan account.
What happens if a company is insolvent?
When a company becomes insolvent, and there is an overdrawn director’s loan account (the company is owed money), the loan account is considered an asset of the company, and should be repaid in full.
Where a company enters into Administration or Liquidation, the loan account will be subject to review, taking into account any changes since the last set of filed accounts. Repayment of the final balance will be requested and for this reason it is important that directors seek advice from a trusted firm of Insolvency Practitioners.
At Keywood Group we are transparent about any potential issues which enables you to fully assess the situation, and reach a solution which is tailored to your individual circumstances.
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 detailed information in our previous blog, here. For tailored advice, you should speak to an independent tax advisor.
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.