Directors' overdrawn loan accounts
Loan accounts are increasingly being looked at by HMRC with a view to collecting national insurance contributions (NIC).
Often a director operates his loan account such that regular amounts are debited to the accounts to meet his mortgage, school fees or other living expenses; the amount overdrawn is subsequently cleared by voting a bonus to bring the account back into balance. In HMRC’s view in this situation the director is receiving an advance of his remuneration and so there is a payment of earnings.
HMRC’s view is that NIC liabilities for company directors arise at the earlier of payment or entitlement. This should not increase the NIC due but requires the payment to HMRC to be made earlier.
There are also occasions where a director operates a loan account but on the understanding that he will clear the overdrawn amount by either introducing some of his own income or he will give up or repay a dividend. These overdrawn amounts are not in anticipation of future remuneration and NIC liabilities will only arise if the amount overdrawn is not cleared in full and the balance is written off. Such written off amounts attract liability.
Remember also to Class 1A NIC liability which will arise on the benefit of the loan.
An excellent article, well described and useful link to HMRC.
How long can a loan account remain unpaid (director overdrawn) on the balance sheet please?
Ambrose
From an accounts perspective there is no time limit. There may be problems if the company is insolvent.
If the loan is not repaid within 9 months of the year end the company has to pay tax at 25% of the loan value to the Revenue. This will be held by the Revenue until such time as the loan is repaid or written off.
The director will have a benefit in kind charge on the deemed interest (subject a de minimis limit on loans up to £5,000) for the period over which the loan is outstanding. If the loan is written off the amount so written off is taxable as a distribution.
Thanks
Cathy
Can anyone please help with a query on a overdrawn Directors Current account.
I resigned from a small unquoted company some years ago, and two years after my departure, the company went into Administration. The company was going to declare the PAYE and write back my Directors loan account to salaries ( I am waiting to hear from the accountant if this transaction took place). The company eventually went into liquidation so I am not sure at this stage if my PAYE was paid back to HMRC. I suspected it remained outstanding. Looking at the Administrators Statement of Affairs, there are no outstanding directors loans, and I was never requested to pay them back. This suggests they were written back to the p&l as salaries, and PAYE declared.
HMRC are now checking if my loan account was repaid by me.
Can anyone help with the potential tax consequences, if any, on the treatment of my Directors Loan account.
Kind Regards
J Stafford
If the loans were grossed up and PAYE paid over I assume this happened after you had left the company. If so you may be liable for any higher rate tax due as the PAYE Is likely to have covered only basic rate tax. The company should have notified you of any amount treated as salary (and tax deducted) so that you could put it on your tax return.
However, if the company was insolvent I think it unlikely to have entered into a transaction to increase its liabilities. The company could have taken the simplest option and just written off the loan. If this is the case then you are liable to tax on the amount of the loan written off as if it were a dividend.
Cathy
Many thanks for your feedback,it is really appreciated. I am having a few sleepless nights at the moment!!
You are correct in stating the loan would either be written off or PAYE paid over. This would have ocurred sometime after my departure from the company. (about 12 months) The loan balance was never pursued by the company, and no formal agreement was ever made.
When the statement of affairs was issued by the liquidator (The company went into Administration first) there was no reference to any outstanding Directors Loan account balance in the accounts, There was a large PAYE balance. At this stage I am assuming the Loan account was written off. I will let you know the outcome when I receive further information.
Kind Regards
Jeff
Hi,
I have a similar predicament, my company went into administration and the amount shown on the statement of affairs for the director’s loan account was not pursued by the administrator and written off.
My question is would any tax have to be paid on this amount?
Thanks
Martin
I am sorry but if the loan was written off the amount is taxable. Essentially the amount written off is taxed as a dividend and should be declared on your return. If you are a basic rate taxpayer no further tax is due. If you are already or as a result of the write off become a higher rate taxpayer then additional tax will be due.
Thanks
Cathy