Understanding director’s loans is an important factor in today’s business world. What is a director’s loan and how does it affect your tax obligation?

A director’s loan constitutes of any money that the director takes out from a company, which is not used to pay out operational expenses, dividends, or salaries. A director’s loan account keeps a record of the amount borrowed by the director. A director’s loan can be used for personal purposes, such as to cover property repairs or medical expenses. A director’s loan should be obtained through prior shareholder approval, although some exemptions can be made, as an example for occasional director’s loan under £5,000. The amount of a director’s loan must be included in the company’s balance sheet at the end of a financial year.

There are tax obligations associated with the director’s loan:

Corporation Tax– if the director’s loan is more than £10,000 and it hasn’t been repaid within nine months after the Corporation Tax accounting period ended.
Personal Tax- if the director’s loan is more than £10,000. Further tax could be due if the interest rate is below the official rate.

HMRC always tracks director’s loans and they focus on whether the account is overdrawn regularly. HMRC wants to stop the practice of “bed and breakfasting”, which is used to evade corporation tax payments. It happens when the director’s loan is repaid before the end of the nine-month period, but the loan is taken out again not long after that. HMRC specifies that if the director’s loan is more than £5,000 and the director takes it out again within thirty days, it will no longer be eligible for tax relief.

Wage Payments And Dividends

Wage payments and dividends are not treated as director’s loan if they are properly registered with HMRC. Both must be paid directly to employees or shareholders. However, it is essential to keep an accurate record each time money is taken out, whether it is for wages, dividends, regular business expenses or director’s loan. Any payment to the director’s business partners, friends or family members must be recorded as well.

Contact British American Tax

To learn more about director’s loans, contact British American Tax today and consult with an expert tax advisor who can answer any questions you might have about taking a pro-active approach to your tax planning.
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