To write off an Overdrawn Directors Loan Account should be a last resort if there are no other ways to fix the position. Here are three common scenarios and the affect of each:
The Company Is In Liquidation
When a Company goes into Liquidation a professional liquidator is called in to close down the company. They follow strict procedures to ensure that all the parties owed money are protected. As well as taking steps to recover any money owed to the Company. This includes any money owed on an overdrawn Directors Loan Account.
The liquidator will review the books closely. If they find that an overdrawn directors loan has caused an otherwise profitable Company to fail then they will take steps to demand that the Director repays what they have taken. They will not hesitate to force a Director to liquidate personal assets to achieve this repayment, including bankruptcy if necessary.
The liquidator has the power to re instate a written off Directors Loan account in the books. This means reinstating the debt and demanding it be repaid.
If the Company is Closing Down
If the Company is closing down and all creditors have been paid off then the overdrawn loan account can be written off. However there are Corporation Tax and P11d Tax implications.
A Company needs to disclose on their Corporation Tax Return details of an overdrawn Directors Loan Account and pay a S455 charge. This is a tax charge which is currently 25% of the overdrawn balance.
Benefit in Kind P11d Tax for the Director
If the overdrawn Directors Loan Account exceed £10,000 during the tax year then the loan is considered a Benefit in Kind. This attracts P11d Tax Charge on the Director at their highest rate of tax and may have some knock on effect for payroll tax coding.
If the Company Continues to Trade
If for some reason the Director is unable to repay a Directors Loan then they can choose to write it off. Again this will attract Corporation Tax and P11D Tax as above.
It is worth noting that if the Director was able to repay the overdrawn loan account the Company would be able to get a repayment for the S455 charge paid. Or if the Director manages to repay the loan within 9 months of year end no S455 charge would need to be paid at all.