I hear this from distressed clients from time to time, so this article addresses the subject of accidental Director’s Loan Accounts (DLA), how they arise; the implications, and how to minimise them.
What is an accidental DLA?
Commonly a DLA arises when a director draws out money, in excess of profits after tax, (effectively taking out what should be kept back to pay taxes). Sometimes, this only becomes apparent when annual accounts are prepared. There are two
– As a consequence of a DLA, there are often insufficient company funds to pay corporation tax, so the company then has to pay last year’s CT from this year’s profits.
– If the DLA isn’t repaid to the company within 9 months of the accounting year end in which it arose, then 25% of the outstanding loan is payable to HMRC. This tax (s.455 tax) is repaid by HMRC – but only after the loan is repaid to the Company in full. If the s.455 isn’t paid, then HMRC will chase the debt and charge interest. Minimising the problem.
– Pay back the loan – even if for only a month. If the DLA is under £15,000, and you can pay it back within the 9 months then you’ve stopped the s.455 tax charge – even if you then re-borrow.
– If the DLA exceeds £15,000, then any repayment for 30 days would reduce the s.455 tax due – but not if HMRC believe there is an intention to re-borrow it. So, if a new need for the money arises, make sure you keep evidence to show it was not for a pre-existing reason.
You can avoid this problem altogether by setting aside (maybe in a deposit account) 20% of a company’s profits to pay future corporation tax – plus any VAT due.
Peter Bromiley ACA
AMS Accountancy Ltd, Swindon SN5 7XF