Understand the Legal and Tax Implications related to the Director's Loan Account and how to minimize risks involved Director Loan Accounts - Legal and Tax Implications

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However, once the Director's credit balance is exhausted, any further funds withdrawn from the company will create a debtor situation.

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 however, 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 exposed to potential prosecution, as detailed below.
• 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 to 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:

• 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

Income Tax

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.

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.

Further Guidance and Assistance

If you would like to speak to us about any of your accounting and tax needs, call us on 01-4429409 or contact us more contact information and follow us on twitter.