The good, the bad, and the director’s loan
We are on hand to describe exactly how NOT to use a director’s loan account.
‘What is a director’s loan?’ is a question clients often ask if they are relatively new in business or recently changed the structure of their business. It is vitally important that you understand the distinction between your company’s money and your own money. If you own 100 per cent of a business, you would assume that all the money in it is yours but that is not the case.
What is the director’s loan?
A director’s loan account is one that tracks money owed to the director from the company or to the company by the director. If you start up a new business and the owner has to put in funds as working capital, say £15,000, this is a director’s loan because the business has not earned the money.
So it’s about the company owing me money?
Yes sometimes, and as the company earns profits, it can repay that £15,000. However, a director’s loan can also work the other way as the director can make money and then owe it to the company.
The scraped car simulation
Imagine that, for work reasons, you were driving your private car and scraped it. You might claim the repair cost against the company but, because it was a private car, you cannot do that so we would have to put it in the director’s loan account and state that the director – you – owed the company the money.
How it becomes a problem
Obviously, £150 for a scraped car won’t cause many problems but it can mount up if directors who are struggling with cash flow start to use company money to pay household bills etc. If the balance isn’t paid within nine months of the year-end then the tax charge is 25 per cent.
Even then, if the director’s loan goes over £10,000 it becomes classed as benefit-in-kind and there could be further tax implications.
The hope on the horizon there is that once you repay the director’s loan and restore the balance to zero, the tax you paid can be reclaimed.
How to avoid issues
If unchecked it can quite easily get to the situation where it becomes impossible to pay off the debt as it spirals upwards with the tax adding to the burden. The key things are to always have a repayment plan in place, and to seek advice early if things start to go wrong.