If you are a director of a limited company then you may have heard of a director’s loan account. Although the account doesn’t technically belong to you it can be used to assist in the day to day running of your business.
HMRC defines it as money taken from your company that isn’t a salary, dividend, or money that you expense or repay on behalf of the company. Below are five things you need to know about a director’s loan account.
Director’s loan accounts are used when you need to access the money in your limited company, other than what you take out as salary, dividend, or business expense repayments. They can be used for when your personal finances need a boost, perhaps due to an unforeseen outlay.
The name is a bit of a giveaway – you must be a director of the limited company.
It’s important to keep your director’s loan accounts accurate and up to date as HMRC will keep a close eye on them. You should make sure that you record and keep note of any cash withdrawals and repayments, personal expenses paid with company money or credit card are also recorded as well as interest charged on the loan.
The company’s expenditure can be funded by loans from its directors; the loan can then be repaid as and when the company’s funds allow.
Should this scenario eventuate it is important to seek professional advice from an accountant, as while the company can write off the loan due to financial problems it is not uncommon for a liquidator to reverse the decision and ask the company to pay it back – so take care to make sure it doesn’t reach that stage.
The tax due on any borrowings will be affected by the interest rates charged and received, so you should speak to an accountant or seek advice from the HMRC for clarification.
The rules state that you have nine months from your company’s year end to repay a director’s loan. The important thing to remember is that it is considered a company asset if it remains unpaid. Which means that if the company is insolvent, a liquidator is likely to chase the balance of the loan.