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 their company financially in 2 ways:

  1. By giving money to it – e.g. lending it investment capital, paying its liabilities, buying supplies, etc;
  2. Taking money out it – e.g. repaying monies lent, repaying expenses paid personally, claiming mileage, drawing funds to use personally 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.  The net effect of these monies in and out leads to a balance with the director.  If the loan account is in credit it is owed to the director, but if it is overdrawn the director owes the company.

So if it is overdrawn I owe money to the company?

Yes, that is absolutely right.  If your company is trading normally HMRC insist this is paid back within 9 months of your corporation tax year/period end.  If you do not, both the company and you will have to pay additional tax.  In normal times this often happens via the declaration of a dividend.

Should your company fall into an insolvency event (administration or liquidation) you will be asked by the Administrator or Liquidator to repay that money.

You may think you have done nothing wrong and in your eyes only put money into your company.   Sadly though, the overdrawn position may have arisen because of how you are paid or possibly other simple factors that you were completely unaware of.  For example, it is common if an accountant does not know what an expense relates to they post it to a directors loan account.  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 paid (remunerated) affect me?

Directors who are also shareholders are often remunerated with a small salary and the rest as dividends.

But, if there are no profits to cover the dividends the withdrawal of the ‘usual monthly payment’ can only be treated as a loan to a director.  That is unless it goes through PAYE, but this rarely happens.

This leads to an overdrawn loan account at the point of liquidation or administration of a business.

Who will know it is overdrawn?

Firstly, an overdrawn loan account will have been shown in management accounts or last set of annual accounts.  It is often shown within “Other Debtors”.  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, receive a bonus, receive a credit against your loan account for a salary instead of any of these being paid.  But, if your company is experiencing financial difficulty then none of these will be feasible.

Now, unless you have substantial personal resources you are unlikely to be able to survive without drawing any remuneration.  But, you may be able to reduce it to an amount that allows you to live whilst minimising your risk.

However, when your company goes into Insolvent Liquidation or Administration most of the above options aren’t available to you.  Your company will cease and you cannot clear it by a future dividend or bonus.  You will also be unable to change (with the benefit of hindsight) how those payments were taken.

Your debt to the company will be treated by the Liquidator or Administrator like any other debt and chase you to repay it.  At that point, what you can afford to repay, how and when all come into play.  Those factors will be considered when reaching an appropriate settlement agreement.  The Liquidator or Administrator will want to examine your assets, liabilities, income and expenditure.

There are other ways of dealing with (or settling) your overdrawn directors loan account, contact us now to discuss.  Once we understand the 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