Last updated: Feb 22, 2023
It can happen that a director takes funds from their company for personal use without processing it through payroll or loses track of a Director's Loan account balance. However, there are considerable legal and tax consequences from having an overdrawn loan account with your company, as explained below. It is crucial to identify and address a debit Director Loan account balance as early as possible. Consistent bookkeeping practices can provide timely and accurate accounts, enabling management to take appropriate action promptly.
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 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.
However, once the Director's credit balance is exhausted, any further funds withdrawn from the company will create a debtor situation.
Under Section 239 of the Companies Act 2014, companies are generally prohibited from giving loans to their directors. However, there are exceptions:
There are potential criminal and personal consequences of breaching Section 239:
The company must declare the Director's Loan as part of its Corporation Tax Return. The company must pay Income Tax at an effect 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.
Company loans made to Directors interest free are liable to Benefit in Kind (BIK) as follows:
The BIK gets put through with the Director's payroll and Income Tax at up to 52% would be payable thereon.
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.
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