Having an overdrawn Directors Loan account can be a worrying position to be in and if you are unable to fix this overdrawn position the next question to ask is ‘Can You Write off An Overdrawn Directors Loan?’
If you are unable to fix an overdrawn directors loan account within 9 months of the Company financial year end, then there are some implications you should be aware of, mainly Corporation Tax and Tax on the Directors as a Benefit in Kind:
The Company needs to disclose on their Tax Return (CT600) something called a S455 charge. This is a tax charge which is currently 25% of the overdrawn balance. The good news here is that the Company can claim this charge back again once the loan account is repaid.
If the loan was repaid within 9 months of the year end the Company won’t have to pay the S455 charge, but will still need to disclose it on the Tax Return.
Benefit in Kind
HMRC consider the overdrawn loan account balance as a tax free loan. So a benefit in kind charge arises at HMRC’s rate of interest that should have been charged on the loan. Fortunately this applies only if the loan was more than £10,000 for tax year 2016/2017 but it will affect both the Company and the Directors Personal tax return (as well as potentially having some knock on effect for payroll tax coding).
Can You Write off an Overdrawn Directors Loan Account?
There are different scenarios under which a Director may want to write off an overdrawn Directors Loan Account and the implications can vary. Here are 3 common scenarios:
1. If the Company Continues to Trade
If you want to write off an Overdrawn Directors loan then the Company will be unable to reclaim the s455 charge and the amount declared as a Benefit in Kind for the Director and Company on a P11d Form.
2. If the Company is in Liquidation
When Companies go into Liquidation a professional liquidator is called in to close down the company. They follow strict procedures to ensure that all the parties owed money are protected and take steps to recover any money owed to the Company which includes those monies owed on Directors loan accounts.
A liquidator will review the books and if it appears that an overdrawn loan account has arisen when what would be a profitable company has been mismanaged then they will take steps to demand that the Director repays the overdrawn loan account. They will not hesitate to force a Director to liquidate personal assets to achieve this repayment, including forcing the Director to declare bankruptcy if necessary.
If an overdrawn Directors Loan account has been written off, the liquidator has the power to reinstate the debt and demand it be repaid.
3. If Your Company is Closing Down
If you want to write off an Overdrawn Directors loan then, as with the scenario where the Company is continuing to trade, the Company will be unable to reclaim any s455 charges made and declare the overdrawn loan as a Benefit in Kind for the Director and Company on a P11d Form.