Understanding the Directors Loan account changes

If you’re a company director or ‘participator’ and take money out of your company that’s not a salary or a dividend – over and above any money you’ve put in – you’re classed as having received the benefit of a Director’s Loan.

If your director’s loan account is overdrawn, your company must pay 25% tax on any amount you’ve not repaid within nine months after the end of your Corporation Tax accounting period. The purpose of this rule is to deter companies from making untaxed loans to their directors rather than paying remuneration or dividends which are taxable as income.

HMRC considers any such loan or advance drawn out of the business as a director’s loan whether or not you have set up any type of account in the company’s books.

A director’s loan account can include:

  • cash payments other than your salary or dividend
  • expenses that you may have paid for using company funds that are actually for personal use
  • money withdrawn for your personal use – for example, to renovate your home, pay school fees or personal Income Tax

This legislation has changed little since its introduction in the mid-1960s but this year sees several significant changes to tackle perceived avoidance, as well as further proposed changes.

In his Budget speech on 20 March 2013, the Chancellor made an important announcement in relation to close company loans to employees and participators. The Government’s intention is to ensure that “the repayment rules are reinforced so relief is only given for genuine repayments.”

HMRC have seen a number of arrangements where companies are avoiding the 25% tax charge, hence the introduction of the legislation to close certain loopholes and prevent avoidance.

One such practice is known as ‘bed and breakfasting’, this involves the participator/director repaying an amount to the company in time to qualify for relief from the 25% tax charge, only to redraw the same amount back from the company shortly after.

To prevent this practice, new provisions are being introduced to the legislation which deny relief if within a “30 day period” any repayment of more than £5,000 made to the company is redrawn either through a loan or advance of money or through an ‘extraction of value’.

In addition to the above, even if the 30 day rule does not apply, relief will still be denied if there are amounts outstanding of at least £15,000 and at the time of a repayment there are arrangements, or an intention, to redraw an amount either through a loan or advance of money, or through an ‘extraction of value’.

In summary, the act of repaying an overdrawn loan for a short time only to qualify for relief from the 25% tax charge, will no longer entitle a company to relief from the charge, and tax will be payable on loans which do not qualify for relief.

This is a chance to get things right now and not leave your company open to any unexpected tax charges.

If you are unsure how this affects you or have any questions, get in touch with our Tax department or call 0161 249 5040 to find out how we can take all of this paperwork away from you with our Company Secretarial Services.