What’s a Director’s Loan Account, s455 tax and who pays it?

What’s a Director’s Loan Account, s455 tax and who pays it?

Business owner asks:

What’s a Director’s Loan Account and how is it taxed?

Acumenica Answers:

There’s a fair amount of moving parts in the answering of this questions, so let’s break it down into the components:

What’s a director’s loan account?

A director’s loan account (DLA) is a record of all transactions between the company and the director, other than any salary payments. If it’s in credit the company owes the director and if it’s in debit the director owes the company money. This is an overdrawn DLA. 

If your DLA is overdrawn at the company’s financial year end, then there may be tax implications. If it’s still overdrawn 9 months after the financial year end, then you might have S455 tax to account for.

OK, so whats S455 tax?

S455 is basically corporation tax. It’s the tax due when a director of a company has an overdrawn DLA that remains outstanding 9 months after the year end. The company pays it along with it’s ordinary corporation tax. It’s payable at 33.75% of the balance outstanding. 

What happens when I repay the loan?

If you repay the loan, you can reclaim the S455 tax you have paid. To do this you need to submit a form L2P to HMRC. This can be done online or on paper.

Other tax implications

If the overdrawn DLA exceeds £10,000 there is an automatic Benefit-in-Kind. You’ll pay income tax on the value of the benefit, and your limited company (as your employer) will make National Insurance contributions.

What happens to a Director’s Loan Account if the company is closed down?

If the company is being closed down and is solvent, then it can be written off and treated  as a distribution (basically a dividend).

Where this happens, and the company has paid s455 tax on this, a repayment can be made using form L2P.

If the company is being closed down and is insolvent, then the director will physically need to repay the loan by returning the funds to the company, and if a liquidator has been appointed, then they will be entirely likely, indeed will probably have an obligation, to pursue the director for repayment. There are also complications arount preference and misfeasance if there is a DLA during, or around, an insolvency.

Final Thoughts

While a DLA can be a useful tool in the tax planning kit, it really needs careful management and consideration. An overdrawn DLA really is the last resort when it comes to taking funds from your company. You’ve got to remember the L stands for “loan”, and loans need to be repaid. This part is often overlooked. It is rare indeed that we can see into the future, but taking a loan from the company and gambling on there being funds available to repay this (via a dividend or similar) can be very risky indeed.

Need further advice?

The Acumenica team are on hand to help business owners with problem DLAs as well as on other matters. To arrange a no-obligation confidential chat, please complete the form on our Contact Us page or call 03330 166559.