A Tax Tightrope: Balancing Director’s Loan Accounts (DLAs)
Director’s Loan Accounts (DLAs) have been a talking point in the news, of late, with company directors writing off their loans to avoid huge tax implications. And we all remember Ovo’s dubious £27m director loans back in 2022. So, how are you best to navigate the tricky tax landscape of DLAs and make sure your company isn’t tomorrow’s local news headline?
We’ve pulled together a quick overview of DLAs, when best to use them and our advice on remaining legally compliant.
What are DLAs?
DLAs are financial accounts that track transactions between company directors and the company itself. They act as a record of all financial interactions between a director and the company they manage. This includes any money or assets moved between the directors and the company in either direction. Money lent, money borrowed or personal expenses for example.
Why are they beneficial?
As with any type of loan, having immediate access to funds is a great way to quickly scale a business, go on that expensive work trip, buy essential resources or hire new staff.
DLAs also offer several other benefits for both company directors and the company:
- Efficient and flexible cash flow- directors can lend money to the company or borrow funds from the company as needed, allowing for more efficient cash flow management.
- Transparency – shareholders, investors, and regulators can review these accounts to ensure that directors are not misusing company funds. This also reduces conflicts of interest.
- Avoiding Legal Issues – properly maintained DLAs and compliance with legal requirements reduces the risk of legal disputes or penalties.
When should they be used?
DLAs should be used for specific business purposes and in a responsible manner to ensure legal compliance and financial transparency. It is important to note that DLA misuse or abuse can lead to legal and financial consequences, and it is always best to consult with financial professionals to ensure they are used appropriately.
Here are some examples of when best to use a DLA:
When: Short-term funds to finance the company during periods of temporary cash flow shortages.
Why: This can help the company meet its immediate financial obligations without the need for formal borrowing arrangements.
When: Investment, directors may invest personal funds into the company.
Why: This demonstrates the director’s commitment to the company’s success and can provide additional capital for growth.
When: Expense reimbursement of business-related expenses personally.
Why: To reimburse legitimate business expenses, ensuring that the company covers these expenses and maintains proper records.
When DLAs go bad
When directors haven’t sought the correct financial advice, use the loans for the wrong purpose or fail to be transparent, there can be legal and tax consequences resulting in liquidation. Like the recently documented Alexander Lauren Associates Limited, who chose to close the company instead of paying back their director’s loans – ouch!
Current Tax rates
There is a potential corporation tax charge for companies relating to loans made to directors. When there is a loan owed by a director at the company year-end date and this is not repaid within 9 months of the year-end, then the company must pay s455 tax at 33.75%. The s455 tax is calculated on the lower of the amount outstanding at the year-end or the amount outstanding at the payment date (9 months after the year-end).
The company can subsequently reclaim this amount from HMRC when the loan is repaid by the director. If the loan is written off by the company, then although the company can reclaim the s455 tax from HMRC, the director will suffer a personal tax charge on the loan write off at 33.75%. The rate of 33.75% is the same as the higher rate of dividend tax, so in effect HMRC are treating the loan taken by the director as being a dividend.
An overdrawn director loan account can also result in a national insurance charge for the company. This applies when the loan is greater than £10,000 and the rate of interest paid on the loan is below the official rate. When this occurs, the loan must be reported as a benefit on form P11D. The company will pay Class 1A National insurance on the value of the benefit at 13.8%. The director will also be taxed personally on the value of the benefit.
In summary, DLAs can be hugely beneficial for directors but only if they take the appropriate advice. Having Management Accounts is the best way to ensure you’re adhering to the latest legal compliance and keeping a transparent record of every transaction.