Tax Investigation Insurance Uk

 

Diirector’s loan is when  director withdraw money from their company that  isn’t related to dividends, remuneration and benefits. Director must keep a record of any money they borrow from or pay into the company – this record is usually known as a ‘director’s loan account. If no money is introduced ( in the form of capital) or taken ( for private use other than dividend , wages and benefits in kind)  from a company, a director’s loan account will be nil. In most cases Directors loan account (DLA)  be in credit as directors invest their own savings into a company to cover revenue expenses or capital expenditures ( buying company assets such as plant and machinery, motor vehicle, land & buildings or any others assets)

What is Debit & credit in directors loan account ?

Directors loan account in Cr (Credit) : When the Limited company is formed and  business is starting up , the directors may lend money to the company for initial investment.  Where money has been loaned to the business and the director’s loan account is in credit, the director can draw on the credit balance at any time without paying any tax. Directors can charge interest to  the company on the loan, the director will need to declare the interest received on his or her personal tax return and pay tax on that interest.

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The company is not liable to pay corporation tax on the amount invested to the company by directors

Directors loan account in Dr (Debit / overdrawn) : Director’s loan account in debit  describes a situation in which a director has taken more money out of a company than they have put in, not including dividends or salaries. A director’s loan account may become overdrawn for various reasons. Director may borrow money from the company to  pay personal bills or purchase personal assets such as house , car and others. Its very important for us to understand how directors loan has to be treated in the accounts and what are the tax implications.

What are the tax implications on overdrawn directors loan account ?

Tax on overdrawn directors loan account depends on the when loan is repaid. There will be no tax on the overdrawn loan account if the loan account if paid full or in excess as a result loan is xero or in credit within 9 months of the accounting period end. For example if the company’s accounting period end in March 2020, overdrawn directors loan accounts has to fully paid and bring the balance to nil or in credit by 31 December 2020.

Corporation tax : If the director unable to pay the loan within 9 months, outstanding overdrawn amount will result additional 32.5% corporation tax. HMRC will release additional tax to the company when director pay the loan in full.

 

Personal tax:  If you’re a shareholder and director and you owe your company more than £10,000 (£5,000 in 2013 to 2014) at any time in the year, your company must:

 

A.   treat the loan as a Benefits in Kind

B.    deduct Class 1 National Insurance

You must report the loan on a personal Self Assessment tax return. You may have to pay tax on the loan at the official rate of interest.

Directors loan account must be disclosed in the financial statements as per companies act which should reflect

1)     Amount of the loan taken Dr/(Cr)

2)   Relation

3)   Date of payment if paid within 9 months

4)   Interest rate

5)    Interest amount

Its very important to  understand the rules and that transactions are debited or credited to the account at the time that they are made. We at Relaxtax will be happy to advise and plan in advance. Please feel free to call us for consultation.