A ‘Directors loan account’ (DLA) is an account in the company’s financial statements that records all transactions between a director and the company. It can include cash withdrawals and any money not utilised wholly and exclusively for business purposes.

At the end on an accounting period, it is not uncommon to discover that insufficient repayments have been made to cover the amount a director has withdrawn over the period, even after taking into account any salaries or interim dividends issued. This results in a debit balance being owed back to the company. Simply, the director has borrowed from the company (usually at a 0% interest rate) and this amount has not been repaid.

In an ideal situation, when the account is found to be overdrawn, it would be preferable for the loan to be repaid, but it does not necessarily need to be. Some of the potential methods to repaying the loan are:

• Cash Repayment – It won’t come as a surprise that the easiest way to repay the overdrawn balance is to give the cash back to the company as a cash transaction.
• Dividend – If the company is sufficiently profitable (and assuming the director is also a shareholder), the company may declare a dividend to the director to clear the balance on the account.
• Salary – If the director is in receipt of a salary, but does not draw this from the company, the salary amount can be credited to the DLA.
• Expense Claims – Directors may incur expenses in their duties for the company that they pay for themselves. Such expenses can be re-charged to the company via an expense claim. Typical expenses include mileage claims and working from home allowances.

The loan needs to be repaid before the company’s corporation tax is due, 9 months and 1 day after the end of the accounting period. If the loan remains unpaid at that date, the company will be liable to an additional tax charge. In specific circumstances, the director may also be required to pay additional tax and national insurance under the PAYE ‘benefit in kind’ (BIK) rules.

Strictly speaking, the tax charge should be considered each time that a loan is made to the director, however, practically, it is only necessary to consider loans or advances that are still outstanding at the end of the accounting period.

The reason for such charges is that HMRC considers the withdrawals to potentially be a technique either PAYE/NIC charges, or the tax due on dividend payments.

In the event that a loan in excess of £10,000 remains outstanding and has not been repaid to the company within 9 months of the end of the accounting period, then an S455 tax charge on the company becomes due. The rate of tax payable is the same as the higher ‘dividend tax’ rate of 32.5%. This amount is included alongside the Corporation Tax payable for the same accounting period on the company’s trading profits.

Should a S455 tax charge be paid, and the loan to the director is repaid to the company in full, the tax can be claimed back from HMRC, but the repayment will not be made until 9 months and 1 day following the end of the accounting period in which the loan is repaid.

An example may help to visualize and understand this:

A director takes a loan of £30,000 from the business in June 2019, and the accounting period ends on 31^st December 2019. The director has 9 months and 1 day to repay this amount, in this case, by 1^st October 2020.

If the director is unable to pay back the loan amount of £30,000 by the 1^st October 2020, the company will be charged S455 tax via the Corporation Tax return, resulting in a charge of £9,750 in S455 tax.

If during the accounting period, the director made a repayment of £10,000 towards the original loan, the S455 tax charge will be based upon the outstanding balance of £20,000 as opposed to the full amount.

In February 2021, the director repays the loan in full back to the company, and their DLA is now in credit. The company can now reclaim the S455 tax charge back from HMRC, excluding any interest charged, but they will have to wait until 9 months and 1 day following the end of the accounting period in which the loan was repaid. In this instance, the end of the accounting period is 31^st December 2021, and so the repayment would be made 1^st October 2022.

S455 tax can be a costly charge if attention is not paid to the level of drawings being taken during the year. Due to the financial strain as a result of COVID-19, it is anticipated that a significant number of 1 and 2 director-managed limited companies may find themselves in a position to be liable for S455 tax charges. If you are concerned about your position, there is no time to act like the present, so get in touch with our team and we will be more than happy to advise you!

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