Understanding Tax on Overdrawn Directors’ Loan Accounts

Wednesday August 2018

For sole traders or partnerships, taking money from a business is a straightforward process, but withdrawing money from a company by a director is a different matter.

An overdrawn DLA is where a director has taken money out of the company that is not classed as a dividend or salary and the figure exceeds any money the director has put into the company.

Having an overdrawn DLA is not necessarily a problem, if the money owed to the company is tracked and can be repaid or offset within nine months of the company’s year end, but if a director is unable to repay the loan on time, problems arise – particularly if it exceeds £10,000.

In this instance, HMRC views it as an interest-free, ‘beneficial’ loan on which the director will be expected to pay income (personal) tax.  Further issues arise when an overdrawn director’s loan is still outstanding nine months after the company’s end of year accounting period.

If the overdrawn director’s loan account remains outstanding nine months after the end of the company’s accounting period (year-end), the company will be subject to a penal tax rate of 32.5% under Section 455 (S455).

This is separate from the corporation tax position.  It needs to be paid, as with standard corporation tax, nine months after the end of the company’s accounting period.

If this S455 tax is paid on time, the tax payment is refundable. However, recovering this tax payment can be a long and difficult process, with HMRC arguing that repayment of the S455 tax is deferred until nine months after the end of the corporation tax accounting period in which the loan is repaid or reduced.

 

 

 

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