MIND THE PITFALLS OF DIRECTORS’ LOANS

November 25, 2013

By Anthony Andreasen, Head of Tax at RMT Accountants & Business Advisors Ltd

It’s about this time of year, as the deadline for corporation tax payments nears for the many firms that adopt the popular 31 March year end, that issues around Directors’ Loan Accounts (DLAs) become a regular topic of conversation for people in my profession.

A DLA covers money taken out of a business by a company director or other ‘participator’ in the company in excess of what they’ve put into it, and any other payments made to the director which do not form part of their remuneration package.

Any such sum is treated as a loan from the company, and if this balance is not repaid or written off within nine months of the company’s accounting period end, HMRC impose a penalty on the company of 25% of the overdrawn balance at the period end.

This penalty is temporary as it will be repaid to the company once the overdrawn balance is eventually cleared. However, this temporary tax charge can create cashflow problems with the company, and is designed to dissuade participators and their associates from extracting funds from the company in the guise of loans rather than as remuneration or dividends.

Overdrawn DLAs have recently come under scrutiny from HMRC, and in particular the practice known as ‘bed and breakfasting,’ where loans are repaid prior to the nine month deadline to avoid the tax charge, only to be redrawn shortly afterwards.

As you might imagine, HMRC doesn’t like this sort of bending of the rules, and it’s already moved to tighten the regulations by setting a 30 day time limit for such subtle arrangements.

If within a 30 day period, there are repayments of an outstanding loan, and new loans are taken, HMRC will limit the relief available from the 25% tax charge. If the repaid loan is fully replaced by another loan within the 30 day period, no relief will be available.

A review of Directors’ Loan Accounts is currently being carried out by HMRC, with a number of options for updating the regulations being considered, and we’re expecting to hear what, if any, changes are going to be made in next month’s Finance Bill.

It’s an area that, for several reasons we encourage our clients to treat very carefully, and to avoid wherever possible.

As with anything relating to company taxation, it’s best to be ahead of the game. Repaying anything that’s owed on your DLA before the end of the accounting period means that you don’t need to refer to it on your corporation tax return, which will give the taxman one fewer reason to decide to take a closer look at your finances.

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