Director’s Overdrawn Loan Accounts – how does it affect me?
Overdrawn Director’s Loan Accounts are a worry for many people, but with proper advice they don’t have to be
We will take you through some of the simpler aspects of this tricky area.
What is a director’s loan account?
A director will often interact with his company financially – lending it investment capital, paying its liabilities, buying supplies, etc.
He/she will then take money out of the company – repaying monies he has lent to it, repaying expenses he has paid personally, claiming mileage, plus other funds that he believes he is entitled to.
He/she may also use the account to sweep up money drawn to pay personal living costs where these do not go through the PAYE system – as is very common and widely recommended by advisers to limited companies. These transactions will be allocated to a directors loan account and at any one time there will be a balance due to the director (known as being in credit) or due to the company (known as being overdrawn).
So if it is overdrawn I owe money to the company?
Yes that is right and if your company is continuing to trade HMRC insist this is paid back within 9 months of your corporation tax year/period end otherwise both the company and you will have to pay additional tax.
Should your company fall into an insolvency event (administration or liquidation) you will be asked by the Insolvency Practitioner to repay that money.
You may think you have done nothing wrong and in your eyes only put money into your company, but sadly the overdrawn position may have arisen as a result of how you are remunerated or other simple factors that you were completely unaware of. We have seen many professional advisers not adequately dealing with this important area, contact us for help without delay.
How does the way I am remunerated affect me?
Directors who are also shareholders are often remunerated with a small salary and the rest as dividends.
However where there are insufficient profits to cover the dividends the withdrawal of the ‘usual monthly payment’ can only be treated as a loan to a director unless it goes through PAYE.
It is therefore common at the point of the liquidation or administration of a business that there is an overdrawn loan account as normal monthly remuneration has been classed as a loan to the director.
Who will know it is overdrawn?
Firstly an overdrawn loan account will have been shown in management accounts or last set of annual accounts, secondly it may have featured in a corporation tax return if the overdrawn loan account was greater than £5,000 and wasn’t repaid within 9 months of the year end. Beyond that the Insolvency Practitioner must review the company’s financial records and may spot the existence of one then. HMRC will want to see it repaid to the company and distributed amongst creditors.
How do I repay it?
If your company is continuing to trade you can pay money back into the company, vote a dividend or receive a bonus but not draw it, or receive a credit against your loan account for a salary instead of it being paid, but if your company is experiencing financial difficulty then none of these will be feasible, similarly unless you have substantial personal resources you are unlikely to be able to survive without drawing any remuneration, but at least you may be able to reduce it to an amount that allows the best of both worlds.
However when your company goes into Insolvent Liquidation or Administration most of the above options aren’t available to you and your debt to the company is treated by the Liquidator or Administrator like any other debt and the simple mechanics of what can you afford to repay, how and when; what assets and liabilities do you have; what about your income and expenditure; all come into play in considering an appropriate settlement agreement.
There are other ways of dealing with (or settling) your overdrawn directors loan account, but once you have contacted us and we understand the circumstances and position of both your business and you we can devise a solution that will clear up your position and satisfy the company’s creditors, including HMRC.
Contact us for a free confidential discussion, help is only a short phone call away – 0330 9002000