An overdrawn Directors Loan Account

If a payment is made to a director and it does not form part of the directors remuneration package or is not an
allowable expense for the company, the payment must be set against their directors loan account. If the director
has a balance available on their directors loan account, then the director can merrily set such a payment against
their loan account with no tax implications.
However, once the available funds are exhausted, the director is in default and therefore a debtor of the
company. This can have two implications:
Corporation tax charge - S455
Firstly, if a balance remains outstanding on their loan account at the companys year end, this can lead to a tax
charge on the company called S455. This only applies to close companies though- generally speaking a
company with less than five shareholders/ directors. The loan account balance must be shown on supplementary
pages of the companys corporation tax and the S455 charge is calculated as 25% of whatever balance was
outstanding on the directors loan account at the period end. The S455 tax is payable nine months and one day
from the end of the relevant accounting period.
An overdrawn directors loan account is effectively an interest-free loan, so S455 is supposed to deter the
company from providing such generous perks to its directors. However, S455 is rather unusual in so much as it is
temporary- it is repaid back to the company by HMRC, as the loan is repaid by the director to the company.
Where the loan is repaid within nine months of the end of the accounting period though, relief is due immediately,
i.e. the S455 is never physically paid (although disclosure is still required in the companys tax return).
Provided the director repays the loan within nine months of the end of the accounting period, say by the company
electing a dividend, S455 may never actually need to be paid.
Benefit in Kind
The second implication of an overdrawn directors loan account is that it can trigger a benefit in kind. As
mentioned above, an overdrawn directors loan account is effectively an interest-free loan. The benefit would be
equal to the interest (the calculation of which is stipulated by HMRC). There are a few exceptions though, which
can mean no benefit arises:
the loan is used for certain qualifying purposes by the director, such as buying an interest in a partnership
the company chose to charge the director interest, but the tests for this are fairly stringent
the loan is deemed small, i.e. it is under 5,000 throughout the year

The interaction between S455 and the benefits code

The interaction between S455 and the benefits code can lead to some unexpected consequences:
A S455 charge may be mitigated by an election of a dividend after the year end. However, if the balance on
the loan was over 5,000 at some point, then a benefit in kind would arise.
A loan remains under 5,000 throughout the year but does not get repaid by the year end or within the nine
months following. This would result in a S455 charge payable but no benefit in kind arising.
So as you can see, an overdrawn directors loan account could result in a S455 charge or a benefit- or both.

Record Keeping and Disclosure

Good record keeping with regards to a directors loan account is essential. Poor records could result in the
misallocation of expenses/ payments and ultimately, the right taxes not being paid.
Good records are also important, because disclosure of the balance on each overdrawn directors loan account
must be made in the companys accounts, and the largest balance during the year must also be stated. This
would ensure that a loan account that starts and ends below 5,000 is highlighted and also shows lenders and
other interested parties how responsible directors are being.
Overall, the key is to keep timely, accurate records and to keep the transactions relating to each of the directors
separate.

So whats the best solution for dealing with an overdrawn

directors loan account?
As with a lot of scenarios, its hard to give one solution that will suit everyones circumstances. But as a general
rule, the triggering of a benefit in kind and S455 charge can be fairly painless provided the director is intending to
repay the loan fairly quickly.
However, if the overdraft may exist for some time, it may be preferable for the company to declare dividends
(profits permitting). Although there may be personal tax implications for the directors, it is likely to be the quickest
way for the overdraft to be cleared. Furthermore, dividends do not attract National Insurance, so it is also likely to
be the cheapest option too.
If you are experiencing problems with understanding personal expenses and payments with your company, AR
Accountants would be happy to discuss this article and your circumstances in more detail.

Written by M A Rana
Principal

AR accountants
Bradford: 54 Park hill drive, Bradford, BD8 0DE
Manchester: Empress Business centre, 380 Chester road, Trafford Park, Manchester, M16 9EA
P: 0161 3272414, 07832216792
E: araccountants@hotmail.co.uk