Directors Loan Account Treatment?

Overdrawn DLA, new client, how do I deal with this?

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Hi

I have recently taken on a new client and have never dealt with overdrawn DLA before.  Their DLA is overdrawn by £180k at year end (30/6) they re intending to pay off some of it within the 9 month deadline but it will still stand at about £100k.  My question is (sorry to sound stupid)  How do I deal with this?  Is it ok for them to pay interest on the amount and plus Corporation Tax or will it have to be taken as BIK as well?  I have looked on HMRC website but cannot find any definitive answers.  Really need a step by step help if possible please.

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By Accountant A
04th Jan 2018 16:29

There is very detailed guidance on the gov.uk website which can be found with a Google search.

https://www.google.co.uk/search?q=tax+on+directors+loan+accounts

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By johngroganjga
04th Jan 2018 16:32

You deal with the S455 tax on the CT return, and the interest benefit on the P11D.

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RLI
By lionofludesch
04th Jan 2018 16:35

Well before somebody chips in - is he a participator ?
Because it's participators who are liable, not directors.

If he pays interest at more that the official rate, there'll be no BIK.

The s455 tax is paid by completing CT600A and sending it with the CT600.

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Replying to lionofludesch:
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By hettydehaan
04th Jan 2018 16:40

Yes he is a particpator. So if he pays 4% then there will be no BIK? Is that right?

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Replying to hettydehaan:
RLI
By lionofludesch
04th Jan 2018 16:49

4% is fine. But why so much ?

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Replying to lionofludesch:
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By hettydehaan
05th Jan 2018 10:12

Its what the director has suggested

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Replying to hettydehaan:
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By lionofludesch
05th Jan 2018 16:56

Counter suggest the official rate of 2½% - or 3% if before April 2017.

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Euan's picture
By Euan MacLennan
04th Jan 2018 16:46

There are (at least) 3 aspects to consider:

1. A loan to a director of more than £10,000 is illegal unless approved by the shareholders in accordance with s.197 Companies Act 2006 (the exception for loans under £10,000 is in s.207(1) CA 2016).

2. The company must pay tax at 32.5% on the balance of any advance to a shareholder (participator) during the year which has not been repaid within 9 months of the year-end under s.455 CTA 2010. So, that will be £32,500 on 1st April, based on your estimate of £100K.

3. As the loan is more than £10,000, then unless the director pays interest interest at the Official Rate (2.5% p.a. from 6 April 2017, 3% before that) to the company on the loan balance outstanding, he will have a BIK of the difference between the interest calculated at the Official Rate and whatever, if anything, he actually pays. This BIK must be reported on a form P11D by 6th July following the end of the tax year. As this deadline has passed, I would suggest calculating the interest, adding it to the DLA and treating it as paid by the payments from the director after the year-end.

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By andy.partridge
04th Jan 2018 17:28

I think the question of interest should have been agreed prior to the loan was made. Taking a hard-line it is too late, but it could be a pragmatic compromise to introduce it after the event. Depends on what kind of accountant you are.

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Replying to andy.partridge:
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By Euan MacLennan
05th Jan 2018 10:08

We can only assume that no form P11D has been submitted by the previous accountant or the company. Perhaps, this was on the basis that it was always the intention to charge interest. Given that possibility, I think that pragmatism is the best approach.

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Replying to andy.partridge:
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By hettydehaan
05th Jan 2018 10:13

I agree but apparently the previous accountant didn't do this so I am taking over blind!

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By JCresswellTax
05th Jan 2018 10:10

I was under the impression there has to be an agreement for interest to be paid before it can wipe out a beneficial loan benefit.

Don't think paying it voluntarily after the event works (strictly).

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