What is a Director’s Loan? And what does it mean for your business?
Getting to grips with funding your business can be in itself, well, a tricky business! There’s so much advice and content out there for you to wade through, isn’t there? Sometimes though, you just need straightforward information to save time. You’re already busy, so I thought I would write a quick and handy guide to Director’s Loan.
First of all, what is a Director’s Loan?
Well – A Director’s Loan is when you (or other close family members) get money from your company that isn’t a salary, dividend or expense repayment. It’s really important that you remember to keep a record of anything you borrow from, or pay into the business, and those records are known as the “Director’s Loan Account”.
How does a Director’s Loan impact your accounting?
At the end of the financial year, you’ll need to provide a “balance sheet” in the annual accounts summary. This will include any money that you owe the company or that the company owes you.
Here’s something to bear in mind – you may have to pay tax on a director’s loan. Your company may also have to pay tax if you’re a shareholder (sometimes called a ‘participator’) as well as a director. It’s important to double check with your bookkeeper or accountant.
Will this impact your personal and company tax responsibilities?
In short, the answer is yes. But there is, of course, a lot more to it than that. Sorry!
First, you need to have an understanding of the status on your Director’s Loan account. This will then have a big impact on those responsibilities. If the account is overdrawn, you owe the company. If the account is in credit, the company owes you.
If the former is the case, you or your company may have to pay tax if you take a Director’s Loan. Depending on how the loan is settled, you might need to check the extra tax responsibilities associated if:
● the loan was more than £10,000 (£5,000 in 2013 to 14)
● you paid your company interest on the loan below the official rate
You repay the loan within 9 months of the end of your Corporation Tax accounting period
Where do you need to start?
When preparing your Company Tax Return, you should use form CT600A, showing the amount owed at the end of the accounting period. In order to complete the form properly, it’s worth having these things in mind;
● If the loan was more than £5,000 (and you took another loan of £5,000 or more up to 30 days before or after you repaid it) pay Corporation Tax at 33.75% of the original loan, or 32.5% if the loan was made before 6 April 2022. After you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest
● If the loan was more than £15,000 (and you arranged another loan when you repaid it) pay Corporation Tax at 33.75% of the original loan, or 32.5% if the loan was made before 6 April 2022. After you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest
● Corporation Tax is paid at 33.75% of the outstanding amount, or 32.5% if the loan was made before 6 April 2022
● Interest on this Corporation Tax will be added until the Corporation Tax is paid or the loan is repaid
● You can reclaim the Corporation Tax – but not interest
When you receive a Director’s Loan, there are no personal responsibilities associated with its repayment. That is to say that if the company should go into liquidation at any point whilst the loan is outstanding, the loan is “written off” or “released” and not “repaid”. However, be mindful that income tax is payable on the loan you receive through your Self Assessment Tax Return.
Just before I go…
I know there’s been a lot to take in, but I couldn’t leave these last few points out.
If the Director’s Loan was more than £10,000 (£5,000 in 2013-14)
If you’re a shareholder and director and you owe your company more than £10,000 (£5,000 in 2013 to 2014) at any time in the year, your company must:
● treat the loan as a ‘benefit in kind’
● deduct Class 1 National Insurance
You must report the loan on a personal Self Assessment tax return, meaning that you may have to pay tax on the loan at the official rate of interest.
If you paid interest below the official rate
As a shareholder and director, your company must:
● record interest you pay below the official rate as company income
● treat the discounted interest as a ‘benefit in kind’
● You must report the interest on a personal Self Assessment tax return. You may have to pay tax on the difference between the official rate and the rate you paid.
Can you reclaim Corporation Tax on the loan?
Your company can reclaim the Corporation Tax it pays on a director’s loan that’s been repaid, written off or released, but you cannot reclaim any interest paid on the Corporation Tax.
A claim could be made after the relief is due – this is around 9 months and 1 day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released. You will not be repaid before this.
You must claim within 4 years (or 6 years if the loan was repaid on or before 31 March 2010).
Reclaiming within 2 years
If you’re reclaiming within 2 years of the end of the accounting period when the loan was taken out, you should use form CT600A to make a claim when you prepare a Company Tax Return for that accounting period (or amend it online).
Use form L2P with your Company Tax Return instead if either:
● your tax return is for a different accounting period than the one when the loan was taken out
● you’re amending your tax return in writing
It’s really important that you tell HMRC how you want the repayment in your Company Tax Return.
If you were to consider reclaiming after 2 years…
You’ll need to fill in form L2P and either include it with your latest Company Tax Return or post it separately.
HMRC will repay your company by either:
● using the details you gave in your latest Company Tax Return
● sending a cheque to your company’s registered office address
I promise we’re almost there!
Here’s a few quick fire points to remember:
If you lend your company money
Your company does not pay Corporation Tax on money you lend it.
If you charge interest
Interest you charge your company on a loan counts as both:
● a business expense for your company
● personal income for you
● You must report the income on a personal Self Assessment tax return.
Your company must:
● pay you the interest less Income Tax at the basic rate of 20%
● report and pay the Income Tax every quarter using form CT61
What if you need more information regarding the interest?
You can request form CT61 online or call HM Revenue and Customs.
HMRC Shipley Accounts Office 0300 051 8371
Monday to Thursday, 9am to 4.30pm
Friday 9am to 4pm
Looking for more helpful and handy tips to make your money go further?
Take a look at our previous newsletters, or get in touch for personalised advice on keeping royal control over your business finances.