Keep Details of Your Director’s Loan Account and Keep it in Credit

In a recent Tax Tribunal case the judge agreed with HMRC that a detailed breakdown of directors’ loan account transactions is required, including dates.

The significance of this is that where the loan account is overdrawn (i.e. the director is due money to the company) there may be a possible P11d benefit for the director and also a tax charge on the company. A taxable benefit in kind will arise where the overdrawn loan exceeds £10,000 at any point and the interest paid to the company on the overdrawn balance by the director is less than the HMRC official rate, which is currently 2.5%.

In addition, if the director is also a shareholder of a close company, there is a 32.5% tax charge payable by the company making the loan.  This tax charge will apply when the loan is still outstanding 9 months after the end of the company’s accounting period end.

Thus you can see why HMRC may require a detailed analysis of transactions between the director and the company.

Note that where the loan is repaid to the company and a similar amount withdrawn within a 30 day period, the tax legislation matches the repayment with the new “loan” and consequently the original loan would still be treated as outstanding.

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