DIRECTOR LOAN ACCOUNTS Understanding Legal & Tax Implications regarding Director’s Loan Account

Last updated: May 20, 2024

It's not uncommon for Company Directors to use company funds for personal needs without processing it through payroll, or to inadvertently lose track of their Director's Loan Account balance. However, there are considerable legal and tax consequences from having an overdrawn Loan Account with your company. It is crucial to identify and address a debit Director Loan Account balance as early as possible. Implementing consistent Bookkeeping practices is key to maintaining accurate accounts, enabling management to take appropriate action.

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Director Loan Accounts - Legal and Tax Implications

Understanding Director’s Loan

A Director's Loan is a common way for a Company Director to provide funds to their company at the time of start-up or to diversify and expand their business. However, taking a loan from the company can have legal and tax implications. It is essential to exercise caution and seek advice since a company is a separate legal entity.

If a payment is made to a Director and it does not form part of the Director's remuneration package, or is not an allowable expense for the company, the payment must be debited from their Director's Loan Account. If the Director has a credit balance available on their Director's Loan Account, then they can set such a payment against their Loan Account with no tax implications.

Although it should be considered that, once the Director's credit balance is exhausted, any further funds withdrawn from the company will create a Debtor Situation.

For these reasons, professional Bookkeeping services are crucial to adhere to Company Law. Incorpro offers comprehensive Accounting and Bookkeeping services which you may find beneficial for your business.

Additionally, for in-depth insights on the responsibilities and duties of Company Directors, explore our extensive Library, which holds a wealth of information.

Company Law Implications

Under Section 239 of the Companies Act 2014, companies are generally prohibited from giving loans to their Directors. However, there are exceptions:

  • 10% Rule - If the value of the loan represents less than 10% of the company's net assets, it is possible for a company to give a Director a loan. If at any point, the Directors of the company become aware, or ought to be aware that the outstanding value of the loan is greater than 10% of the company’s net assets, action must be taken or the Company Director will be exposed to potential prosecution, which we will go into in more detail later in this article.
  • Summary Approval Procedure - The Summary Approval Procedure was introduced into Irish company law in 2014, and allows previously restricted activities, such as Director Loans, to be approved, while also providing a mechanism to hold Directors accountable. Approval is dependent on certain procedural actions being taken by the company Shareholders and the company Directors before the action is undertaken.
  • Directors' Expense Exception - A company can provide funds to its Directors to pay for expenses incurred while performing their duties for the benefit of the company.
  • Group Exception - A company can lend to another company within the same Group.

There are potential criminal and personal consequences of breaching Section 239 of the Companies Act 2014:

  • Criminal Prosecution - A Company Director found to be in breach may be subject to fines and imprisonment.
  • Personal Liability - In certain instances, should a court rule that the loan arrangement materially contributed to the company’s inability to pay its debts, the Director may be held personally liable for all the company’s debt, without restriction.

Tax Implications

In the field of Company Finance, Director's Loans carry significant tax implications, particularly in terms of Income Tax and Benefit in Kind (BIK), which we will go into more detail below.

Income Tax

For Corporation Tax purposes, any Director's Loan must be declared by the company. The company is required to pay Income Tax at an effective rate of 25% of the loan amount by its Corporation Tax Return deadline. If the loan is repaid by the Director in the following years, then the company can request a refund of the Income Tax paid.

Managing Tax Returns can be complex, which is why Incorpro offers professional services in Tax Returns at competitive prices. Visit our Tax Compliance and Returns Service page for more information.

Benefit In Kind (BIK)

Company loans made to Directors interest free are liable to Benefit in Kind (BIK) as follows:

  • If the loan is for the purchase of a home, there is a reduced BIK of 4%.
  • For any other loans, the BIK rate is 13.5%.

The BIK gets put through with the Director's payroll and Income Tax at up to 52% would be payable thereon.

Summary

To avoid Director's Loan issues and comply with Revenue and Company Law guidelines, it is safest to only withdraw reimbursable business expenses and net pay from the company. For best practice, reconciling accounts each month to identify any potential liabilities at source is recommended.

Incorpro offers comprehensive Accounting and Bookkeeping services, so that we can take care of these matters for you. This way you can enjoy peace of mind with Accounting and instead, concentrate on your business.

Further Guidance and Assistance

Should you have any queries or require assistance with your Accounting and Tax needs, our dedicated team at Incorpro is here to help. Connect with us by calling 01-4429409, or visit our Contact Page for more ways to get in touch. Stay updated and engaged by following our Social Media Pages on Twitter, Facebook, LinkedIn and Instagram.

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