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Directors' loans: A quick guide

12th May 2022
Brought to you by
myfirmsapp

Myriad Associates helps businesses maximise tax reliefs.

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For directors of limited companies, a directors’ loan can be extremely handy for large personal purchases. This may be a property for example. However there are of course various tax rules to know about, and it’s really only suited to short term borrowing as a last resort.

We’ve put together this quick-and-easy guide to directors’ loans as a potentially useful funding stream for your clients.

Director’s loan accounts

A director’s loan means that company directors can extract money from the business alongside any dividends, salary or expenses payments. However, in order to do this, it’s crucial that a director’s loan account or DLA is maintained. It acts as a record of everything that has been paid into - or out of - the business. These details must then be submitted as part of the balance sheet in the company accounts at the end of every financial year.

Ahead of submitting the company accounts, the following information must be included in the DLA:

  • All details relating to withdrawals and repayments the company director has made;
  • Any interest that has been charged in relation to the director’s loan throughout the year;
  • How much - in terms of any personal expenses - that’s been paid by the company to the director. This may be expenses made on a company credit card for example.

When is a director’s loan appropriate?

Director’s loans are very flexible, which makes them an attractive option when large amounts of cash are needed quickly. However, it’s essential that people fully understand the commitment they’re undertaking, as it’s a type of borrowing that can attract high levels of tax if it doesn’t comply with HMRC’s tough parameters.

Although no specific rules exist around how long a directors’ loan can last, it’s essential your client is sure they can repay it in full within the terms. Failing to do so can break HMRC strict regulations and lead to hefty financial penalties.

Why may a director’s loan be a good option?

The ease and speed of taking out a director’s loan can make it look much more appealing than a bank loan for example. However, if rules and repayments aren’t met there can be far reaching consequences for both your client and their company. However, it should be a short-term solution where a lump sum is required for personal financial reasons. Common reasons include (besides property purchase and maintenance): children’s school/university fees and car purchasing/repairs.

How much can be borrowed with a director’s loan?

There aren’t any set legal limits regarding maximum or minimum amounts when it comes to borrowing through a director’s loan. However, it obviously depends on how long the business can manage without the money, and how much it can afford to lend in the first place. After all, the last thing your client needs is for their company’s cashflow to suffer, especially in these unpredictable times.

However, anyone taking out a directors’ loan needs to understand the tax implications, particularly if they’re borrowing more than £10,000 because it’s then a benefit in kind. This obviously means they’ll need to submit a P11D form to HMRC by 6th July. They must also declare the loan on their self-assessment tax return.

The company will be required to pay Class 1 National Insurance. Tax may also be due on the DLA if it’s overdrawn at the date of the company’s year-end.

If the directors’ loan is over £10,000, your client will also need to obtain approval from each of the company shareholders. Shareholders must agree to the amount being borrowed, and the terms of the loan, before any money changes hands.

A word on directors’ loans as a benefit in kind

A director that’s using business assets for personal gain must declare it as a benefit in kind for tax purposes. As mentioned, a directors’ loan that is over £10,000 at any point is deemed a benefit in kind. It will therefore be liable for Class 1 National Insurance deductions in addition to personal tax at the relevant rate.

Can director’s loans be written off?

When a company starts to struggle for cash there’s usually an overdrawn DLA in there somewhere. While the company itself can go decide to “write off” the loan, liquidators will frequently reverse this before asking the company director to repay the loan so that the company’s creditors can also be repaid.

So yes, in theory a directors’ loan can be written off but there are financial implications both for your client and their company. It’s essential therefore that before any decisions are made, they are strongly encouraged to take detailed financial advice so their full financial landscape can be understood.

This article was brought to you by Myriad Associates

Myriad Associates is a market-leading R&D tax consultancy with bases in the UK, France and Ireland. Having recently marked our 10-year anniversary in the business, we work tirelessly with both businesses and accountants to achieve the valuable R&D tax relief companies deserve.

Partnering with us is also the ideal opportunity to expand your accountancy services, attract new clients and strengthen your brand. It’s like having a whole new department dealing solely in R&D Tax Credits and grants - but without the stress and overheads of employing staff.

And of course, we offer a great range of partnership packages too, earning your practice as much as a 30% fee.

No matter where your accountancy firm is based, working with an experienced R&D tax consultancy makes sense. So why not find out what Myriad Associates can do for you by calling 0207 118 6045 or send us a message.

We work entirely remotely for complete flexibility that suits you and your clients. Average R&D tax relief claims currently sit at around £55,000 in the UK- even amongst SMEs. Make sure your clients don’t miss out.