An Overdrawn Loan Account can be a concern with Companies House, HMRC and even in some cases, the general well being of a Company.
A Directors loan is a record of money put into a Company by a particular Director and drawn out by that individual. Generally a Director can expect to be paid a salary and/or a dividend during a financial year. However it can happen that a Director takes too much salary or more dividends than the Company can legally distribute. Here are some ways to fix an overdrawn loan account:
Repay Your Directors Loan within 9 Months After Year End
If you can repay the debit balance on your Directors Loan within 9 months after the Company year end, then there is no harm done. Just keep a record of any amounts you have put in to repay your Directors Loan so your accountant reflects this repayment on your behalf. Keeping good records, especially when it comes to a Directors Loan Account is really important.
Claim For Any Missing Expenses
It is so easy to forget about cash spent during the year – lunches, client entertainment, mileage or Company payments coming out of your personal money. If your Company owes you money then this could be offset to fix an overdrawn loan account.
Account for Seed Capital
If you loaned the Company any money at the start up period, then make sure that this loan to the business is accounted for in the books.
Declare an Additional Dividend
If the profits and reserve of the Company allow declaring an additional dividend is one way to fix a debit balance on an overdrawn Directors Loan Account. Seek advice from a professional to make sure the additional amount is legal and whether it affects any other shareholders in the Company.
If you are unable to fix an overdrawn directors loan account, 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).