Being a director of a limited company comes with lots of responsibilities. One aspect of the role, which sometimes gets played down, is understanding the myriad of complex rules and legislation that come with running a limited company. \r\nA Director\u2019s Loan is one of these complicated pieces of legislation that director\u2019s need to be familiar with.\u00a0\r\nDon\u2019t panic if you don\u2019t know much about it, as this guide goes into great depth and looks at what a director\u2019s loan is, discusses the guidelines you need to follow and covers the tax obligations of a director\u2019s loan.\r\n\r\nDirector\u2019s Loan explained \r\nOne of the advantages of a limited company is your personal liability is limited.\u00a0 But on the flipside, any money that is held within the company belongs to it and not you personally.\u00a0\r\nThis is something that can easily be overlooked, but it can have serious consequences for you as a director if you take money out of the company without following the correct procedures. \r\nHMRC defines a Director\u2019s Loan as \u201cmoney that is taken from the company that isn\u2019t either a salary, dividend or expense repayment, or money that you\u2019ve previously paid into or loaned the company.\u201d \r\nIn summary, any money that is taken out of the company for any reason other than what has been explained, must be recorded in your personal director\u2019s loan account. \r\n\r\nWho can take a Director\u2019s Loan? \r\nThe clues in the name, only a director can take a Director\u2019s Loan. \r\nFor clarification, a director is someone who manages the day-to-day activities, including operational, financial and administrative, of the company. \r\nA director is appointed by the company\u2019s shareholders and in small limited companies, the shareholder and director may be the same person. \r\nIt\u2019s a legal requirement that UK limited companies have one director, and that person must be over 16 years and must not be disqualified from being a director. \r\nThe director doesn\u2019t have to reside in the UK, but the company must have a UK registered address. \r\n\r\nWhy take a Director\u2019s Loan? \r\nThere may be times when you need extra money, such as having to pay for unexpected repairs to your property. \r\nWhatever, the reason, any money that you take out of the company which isn\u2019t a salary, dividend or expense repayment is classed as a Director\u2019s Loan and must be recorded in your personal Director\u2019s Loan Account (DLA). \r\nAt the end, you may either owe the company money or it will owe you money. Either way, you must record this as an asset or liability on the balance sheet section of your company\u2019s annual accounts. \r\n\r\nWhat is a Director\u2019s Loan Account? \r\nA Director\u2019s Loan Account is a record of transactions (asides salary and dividends) between the company and its directors.\r\nTwo transactions are typically recorded on a Director\u2019s Loan Account, these are;\r\n\r\n\r\n \tCash withdraws from the company\r\n \tPersonal expenses that are paid for using company money or credit card\r\n\r\nWe get a lot of questions about expenses. As a rule, a legitimate business expense is deemed by HMRC as, \u201cbeing incurred wholly, exclusively and necessarily for the running of the business.\u201d \r\nIf it has a dual purpose i.e. has a personal use as well as business use, it\u2019ll be classed as a personal expense. \r\nExamples of allowable business expenses include; accounting or bank fees, marketing and advertising costs, insurance costs and rent. \r\nOur Expenses Guide has a full list of allowable business expenses. \r\nTo avoid confusion and to stop your company\u2019s accounts from becoming \u2018messy\u2019 we strongly advise against paying for personal expenses with the company\u2019s money. \r\n\r\nHow to take a Director\u2019s Loan\r\nTaking a Director\u2019s Loan is not as straightforward as withdrawing money from the company\u2019s account. \r\nFirstly, you need approval from the company shareholders, particularly if the loan is over \u00a310,000. If you\u2019re the only shareholder, getting approval is fairly easy. \r\nA copy of this approval must be kept in writing.\r\n\r\nWhen to repay a Director\u2019s Loan\r\nHMRC rules state that loans must be repaid within nine months of your company\u2019s year-end (the date your company\u2019s accounting period ends) otherwise you\u2019ll pay additional tax. \r\n\r\nAre Director\u2019s Loans taxable?\r\nThis is the most frequently asked question about Director\u2019s Loans. The answer unsurprisingly isn\u2019t straight forward. \r\nIf tax is due on the loan, depends on when the loan is repaid. \r\nIf you repay the entire loan within nine months and one day of your company\u2019s year-end, no tax is owed. \r\nIf your Director\u2019s Loan Account is overdrawn on this date, additional Corporation Tax of 32.5% is owed - it\u2019s referred to as Corporation Tax, but it\u2019s actually called Section 455 CTA Tax. \r\nExample: \r\nSay you borrowed \u00a36,000 on 11th May 2019 and your company\u2019s year-end is 31st October 2019. You\u2019ll have until 1st August 2020 to repay the loan. \r\nIf you don\u2019t it, you may have to pay 32.5% of \u00a36,000 \u00a31,950 in addition to your Corporation Tax. \r\nIf you pay off some of the loan within the nine months and 1-day threshold, you\u2019ll pay tax at 32.5% on the outstanding amount e.g. \u00a33,000 x 32.5% \u00a3975. \r\nThere\u2019s good news though, as the tax charge is repaid to you by HMRC, once you clear the full amount of the loan. \r\n\r\nHow to repay the loan \r\nThe easiest way to repay a Director\u2019s Loan is to use a dividend payment or salary to move the money back into the company\u2019s bank account. \r\n\r\nWhat if I can\u2019t repay the loan?\r\n\r\nWe\u2019re sure you intend to repay the loan; however, life isn\u2019t straightforward, and you may find yourself in a situation where you don\u2019t have the funds to repay it. For instance, a contract may suddenly end, or your next contract gets pushed back, leaving you with a shortfall in your finances. \r\nThe ideal scenario is that you have enough money in the company\u2019s bank account to clear the loan by taking a dividend that is equivalent to the loan amount. This will deem the loan to be a dividend under the Income Tax (Trading and Other Income) Act 2005. \r\nHowever, if by failing to repay the loan and placing the company in financial difficulties that it has to be liquidated, the liquidator can chase you for repayment.\u00a0\r\nIn extreme cases, you could up in court or even be made bankrupt. Being declared bankrupt has serious consequences, for example, you can be prevented from being a director of another limited company, you can\u2019t start or manage another company without the consent of the court and you\u2019re prevented from a taking a loan over \u00a3500 without informing the lender of your bankruptcy. \r\n\r\nBed and Breakfasting\r\n\u2018Bed and Breakfasting\u2019 is a term referred to describe a situation that aims to avoid paying tax on a Director\u2019s Loan. \r\nBed and Breakfasting is said to occur when a director repays the loan in full before their year-end to avoid penalties, to then immediately take another loan, with the intention never repaying it. \r\nHMRC has implemented a measure to prevent this; when a loan over \u00a310,000 is repaid by the director, no other loans in excess of \u00a310,000 can be taken within 30 days. If this happens, the entire loan will be taxed. \r\nIt\u2019s important to point out that loans that are taken outside of the 30 days may still be taxed, particularly if it\u2019s in excess of \u00a315,000: \r\nThe rules state that if a director takes a loan that is over \u00a315,000, and before any repayment is made there is an intention by the director to take out a future loan over \u00a35,000 that isn\u2019t matched to another repayment, the Bed and Breakfast rules will apply. \r\nThe rules surrounding Bed and Breakfast are very complex and we advise you to seek advice from an accountant. \r\n\r\nIs a Director\u2019s Loan a Benefit in Kind? \r\nBenefits in Kind sometimes referred to as \u2018perks\u2019, are benefits you receive from the company that isn\u2019t included in your salary or wage. It could be a service you use personally but which the company pays for. \r\nHMRC levy a tax on Benefits in Kind to prevent them from replacing your salary. \r\nHMRC will deem a Director\u2019s Loan to be a Benefit in Kind if:\r\n\r\n\r\n \tThe loan exceeds \u00a310,000 at any time\r\n \tYou\u2019re not paying interest on the loan\r\n \tThe interest you\u2019re paying is below HMRC\u2019s average beneficial loan rate\r\n\r\nIf the loan meets any of the criteria set out above, it\u2019ll be classed as a Benefit in Kind and you\u2019ll be required to include it on a P11D. If the loan is under \u00a310,000 and no interest is charged this is not a benefit.\u00a0\r\nYou\u2019re also required to include the loan\u2019s cash value equivalent on your personal self-assessment tax return.\r\n\r\nTo calculate the cash value equivalent, you\u2019ll have to refer HMRC\u2019s list of official rates. \r\nAs an example, say you took out a loan of \u00a36,000 in May 2019, the cash value equivalent will be \u00a3150. \r\nYour limited company would pay Class 1A National Insurance on the loan\u2019s cash value equivalent, \u00a3150 x 13.8% \u00a320.70. \r\nYou as a director of the limited company would also pay Income Tax on the cash value equivalent. The amount depends on which tax band you fall into. If you a basic tax rate payer, you\u2019d pay \u00a330 (\u00a3150 x 20%). \r\nTo avoid paying these charges, we recommend paying interest on the loan at the same rate (or higher) to HMRC\u2019s average beneficial loan rate. \r\n\r\nDoes HMRC monitor Director\u2019s Loans? \r\nYes, they do! In fact, they pay close attention to accounts that are regularly overdrawn. If they make the decision that your loan is, in fact, a salary, they\u2019ll charge Income Tax and National Insurance on the amount. \r\nOur advice is to monitor your account closely to ensure your withdrawals don\u2019t go over \u00a310,000. \r\n\r\nShould I take out a Director\u2019s Loan? \r\nTaking a Director\u2019s Loan can be handy in certain circumstances, such as if you experience unexpected expenses. However, you should plan on paying it off as soon as possible to avoid the S455 tax charge. \r\nIf you find you\u2019re struggling to repay the loan, you should consider repaying it using a dividend payment (only if the company\u2019s profits allow it) \u2013 as a side note, personal tax charges may apply to the dividend payment. \r\nIn summary, before considering a Director\u2019s loan, seek professional advice from an experienced accountant because as you see, there are lots to consider. \r\nIf after reading this comprehensive guide, you have any further questions please get in touch with us on 01962 867550 or send us a message via our website.