The directors’ loan account is an important aspect of how a private company operates its business and records transactions with its directors/shareholders, yet it is also a subject in respect of which there is a considerable amount of confusion, not least the tax implications arising in certain circumstances.
It is very common for directors of small private companies to lend money to, or borrow funds from, their companies. However, it is important to remember that companies are separate legal entities from their directors and shareholders and it is essential that personal funds/assets are clearly distinguished from funds/assets belonging to companies.
Any transactions between a director/shareholder and their companies will have varying implications and tax treatments and, , need to be carefully recorded, which is often dealt with via a director’s loan account.
How they work
A director’s loan account (sometimes also referred to as a director’s current account) can, in practice, be any form of account or bookkeeping record and is operated like a current account with a clearing bank, showing the running balance between the director and the company.
The account will show various credits (i.e. monies owed to the director from the company) such as undrawn salary, undrawn dividends, money put into the business and expenses paid on behalf of the business (not reimbursed) etc. Monies withdrawn by directors from the business for non-business purposes will be shown as a debit to the account and reduce the running balance.
When the balance is, in overall terms, a credit figure, i.e. in net terms the company is holding funds for the director, then this is classed as a loan to the company from the director. When, in net terms, the director has borrowed funds from the company there will be a debit or overdrawn balance. From time to time balances can move from credit to debit and vice versa.
If the company has more than one director then, strictly speaking, separate records for each should be kept, although it is usually acceptable for spouses and civil partners to operate joint accounts (again in a similar way to a joint account held at a clearing bank).
One particular point to note is that otherwise unpaid remuneration or dividends can only be credited to a director’s loan account at the point at which such remuneration (received in an individual’s capacity as a director) or dividends (received in an individual’s capacity as a shareholder) is formally voted.
The Companies Act 2006 sets out the appropriate procedures but under no circumstances can remuneration or a dividend be said to have been voted at some point in the past, i.e. any credit arising from the voting of remuneration or a dividend can only take place on the date on which the appropriate resolutions are passed which in respect of remuneration would also (usually) be the date on which a PAYE/NI liability would be triggered.
Director’s loan accounts can be a simple way for both companies and directors to obtain funding without the need to involve a third party. However, it is important to understand the consequences and effects of any transactions undertaken. It is also important that all transactions are correctly recorded, as and when undertaken, and that directors and their companies are aware of the running balance at all times.
By David White a Partner in Charterhouse, based in Beaconsfield
David White is an equity partner in Charterhouse a practising firm of Chartered Accountants based in Beaconsfield and Harrow. David is Charterhouse through and through having been with them for 30 years...