{"id":272,"date":"2013-04-26T12:50:04","date_gmt":"2013-04-26T12:50:04","guid":{"rendered":"http:\/\/www.taxpartnersuk.com\/blog\/?p=166"},"modified":"2013-04-26T12:50:04","modified_gmt":"2013-04-26T12:50:04","slug":"directors-loan-account-dla","status":"publish","type":"post","link":"https:\/\/www.taxpartnersuk.com\/blog\/directors-loan-account-dla\/","title":{"rendered":"Director\u2019s Loan Account (DLA)"},"content":{"rendered":"

With the explosive growth of private limited companies in recent times, director\u2019s loan account has come to occupy a special place on small company balance sheets. Whether made up of money spent by the director on behalf of his company or conversely the company paying for personal expenses of the director, DLA continues to attract the taxman\u2019s attention as never before. This article examines the law surrounding this account in some detail.<\/p>\n

Lending to the company (Credit balance in DLA)<\/b><\/p>\n

Start-ups need funds, but banks and other lenders won\u2019t gamble with their money lending to start ups. This is how generally the DLA story begins! Desperate for start-up cash, the directors use their personal funds or look up to their friends and families for help.<\/p>\n

Money when loaned to the company goes in to the credit of a DLA and its repayment to the director obviously has no tax or National Insurance (NI) implications.<\/p>\n

Credit balance in a DLA could also be built over a period of time as the director starts subsidising the company. To keep the company liquid, the directors will rather\u00a0have their salaries and dividends\u00a0credited in to the DLA,\u00a0than\u00a0all drawn out. A dividend credited to the DLA has no tax consequences for the company as such, and such dividends could be withdrawn whenever funds become available. As a\u00a0common practice with one-man band companies, salary or bonus also gets credited to the DLA in the month of March so as to use up the director\u2019s basic rate threshold available\u00a0for the tax year. This treatment, however, has personal tax implications for the director in that PAYE and NIC are due as soon as salary and\/or bonus is credited<\/em> in to the DLA (s.18(1) of ITEPA 2003). Depending upon the nature of dividend, personal tax will also become due in the year paid (interim dividend) or declared (final dividend).<\/p>\n

So far so good; but all the hell breaks loose as soon as money starts leaving the company, and in to the director\u2019s account. Take interest on the loan, for example. Paying interest on the loan received from the director has multiple tax implications. In order for the company to claim deduction of interest as an expense, the loan should have been used wholly and exclusively for the purposes of the business of the (close<\/b><\/span>) company, or of the business of any associated company of the company which is also a close company<\/b><\/span><\/a> <\/span>that is not a close investment-holding company (s.392(2) ITA 2007). Whilst making payment of interest, the company is obliged under s.874 of the Income Tax Act (ITA) 2007 to deduct tax (at 20%) and as a consequence file form CT61 with HMRC on a quarterly basis. The director receiving the interest is normally liable to pay tax on its receipt. However, subject to meeting certain conditions under s.392 of ITA\/07 the director could claim interest relief. The primary condition is is that the company in question should be a \u2018close company\u2019 (no close investment holding companies please!). The other conditions include a \u2018capital recovery\u2019 condition (don\u2019t take capital out so long as loan remains unpaid) under s.393(2) and<\/i> either the \u2018full-time working\u2019 or the \u2018material interest\u2019 (at least 5% stake in the ordinary share capital) condition under s.393(3). It must, however, be noted that the interest relief will be unavailable if the director uses his personal \u2018overdraft\u2019 account or credit card to fund the company (s.384, ITA\/07).<\/p>\n

Lending to the director (Debit balance in DLA)<\/b>\u00a0<\/b><\/p>\n

As the recession starts biting, credit balances in the DLA are giving way to ballooning debit balances. With cash all drawn out and being unable to pay off tax\u00a0and other dues, companies in many such cases file for strike off<\/strong><\/span><\/a>,<\/span> often without realising the consequences.\u00a0Whilst the company law restricts lending to the director, the tax laws have complicated anti avoidance provisions in place to check tax leakage.<\/p>\n

S.197 of the Companies Act (CA) 2006 stipulates members\u2019 ordinary resolution for granting any loan to a director where the loan exceeds \u00a310,000 (s.207). However, the company law restrictions can only be of academic relevance where, as in many cases, the director is also be the majority shareholder of the company!<\/p>\n

Tax law implications are different. The taxman would be itching to treat the loan taken out by the director as a distribution at the first opportunity.<\/p>\n

Broadly a corporation tax charge (s.455 (CTA 2010)\u00a0applies where a close company makes a loan or advances money to a participator<\/b><\/span><\/a> in<\/span> the company or an associate of such a participator and such loan or advance remains outstanding 9 months after the accounting period has ended.<\/p>\n

The tax charge on the company\u00a0<\/b><\/p>\n

O<\/b>verdrawn DLAs attract a s.455 charge at the rate of 25% on the lower of the amount outstanding at the year end and nine months after the year end. It is repayable to the company by HMRC nine months after the end of the accounting period in which the loan was repaid.<\/p>\n

BIK charge on the participator<\/p>\n

Where the loan is more than \u00a35,000 a benefit in kind will arise on the loan calculated at the HMRC official rate (currently 4% p.a), with its consequential NI and personal income tax implications. The interest could be calculated on the average outstanding at the beginning and end (s.182, ITEPA 2003) or on the daily balance outstanding (s.183 ITEPA 2003). A BIK charge will not arise where the director is paying interest on the loan at the officical HMRC rate.<\/p>\n

What all constitutes a director\u2019s loan?<\/p>\n

Simply put, any money taken out of the business over and above what you’ve put in, and what is not your salary or dividend is a loan. It includes any \u2018private\u2019 payments made by the company on the director\u2019s or his family, friends, business partner or any associated person\u2019s behalf. Some further examples are:<\/p>\n