Directors Loan Account

Directors' Loan Account

As a director of a company you are able to take a loan from your company via a directors loan account. This account facility works both ways and also enables a director to loan money to the company. This facility recognises that, as a director, you have an interest in the company and therefore the director and the company can assist each other’s cash flow when required.

If you take money out of your company over and above the amount you have loaned to the company – and that money is not accounted for as salary or a dividend – then it is accounted for as a loan from the company to you. Your director’s loan account is overdrawn.

If this overdrawn director’s loan account is not rectified by 9 months after your company year-end, you (as the director) will be liable to pay S455 Tax on your overdrawn director’s loan account. It is not technically Corporation Tax but in practice, you calculate the tax on your overdrawn loan on your Company Tax Return and add it to the Corporation Tax that is due. This must be declared in
section 455 of your company’s tax return.

The current tax rate for an overdrawn directors’ loan is 25% of the overdrawn loan.

Bed & Breakfasting

As a short term measure it had been fairly common for company directors to temporarily repay money they have borrowed from the company for the sake of the company’s year-end tax returns and then shortly thereafter withdraw the money again in the new company tax year. This is referred to as “bed and breakfasting”.

This strategy has now been prevented by measures introduced by Her Majesty’s Revenue & Customs (HMRC). Profit extraction should be liable for tax whether taken as a dividend or by holding an overdrawn directors’ loan account.
In order to repay a overdrawn director’s loan account you need to create a surplus in the director’s loan account – the Sovereign Corporate business opportunity can assist in this.

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