An Overdrawn Directors Loan Account has knock on effects with Companies House, HMRC and even the general well being of a Company. Here are some ways to handle an overdrawn directors loan account:
Repay The Overdrawn Directors Loan Account
Repaying the loan is the simplest way to rectify the problem. If this is repaid within 9 months of the Company Year End then no harm is done. Although there will be a disclosure in the Company Accounts along with a note that this will be repaid.
Claim For Any Missing Expenses
It is so easy to forget about cash spent during the year – lunches, client entertainment, mileage or Company payments coming out of personal money. These amounts can be offset against the overdrawn loan account.
Account for Seed Capital or Investment Money
If the Director made loans to the business then check that everything lent is logged in the Directors Loan account.
Declare a Dividend
If the Director is also a shareholder, declaring a dividend is an easy way to fix an overdrawn directors loan account.
Always make sure the Company has sufficient reserves and profit to do this and the impacts on any other shareholders.
Write off the Overdrawn Directors Loan Account
The decision to write off an overdrawn directors loan account is not one that should be taken lightly. It also has knock on effects for tax purposes, which depend on the reason behind choosing to write the balance off.
If a Director is unable to fix an overdrawn directors loan account within 9 months then there are tax implications. The balance will not only be disclosed in the Company accounts but will also attract Corporation Tax and P11d Tax.
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. But the Company can re claim this charge once the loan account is repaid. If the loan is repaid within 9 months of the year end, no disclosure or S455 is needed.
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.