Do you owe your business money? It could affect the amount of tax you pay

By Heather Bright, Partner and ARA specialist

If you are a shareholder or director of an agricultural business and you borrow or lend money to it, you need to be aware of what a director’s loan account is, as well as your tax obligations in relation to it.

Essentially, a director’s loan account (DLA) allows you to keep track of any money that you, or another shareholder, lend to your business or borrow from it.

This covers any transactions taken out of a limited company that are not salaries, dividends or business expense repayments.

The purpose of a director’s loan account

Depending on your personal finances, you may need to take out a loan from your business to support yourself.

When borrowing money from your business, you must consider how this will impact the company’s cash flow. If the business is in a weak position, taking out a loan could damage it further.

On the flip side of this, you can lend money to your business to cover necessary purchases, such as new equipment.

A loan to your business can also allow you to invest money in the business but ensure you are repaid when the business can.

Are the loans taxable?

The way that the loan is taxed will depend on whether you owe the company money (the account is overdrawn) or the company owes you money (the account is in credit).

Overdrawn accounts

If you take out a loan from your company, the company will generally be responsible for paying Corporation Tax.

This loan must be reflected on your company tax return and the company will have to pay Corporation Tax on any amount that has not been repaid nine months after the end of your accounting period.

However, your company may be eligible to reclaim the Corporation Tax after the loan has been repaid, written off, or released. It should be noted that this doesn’t include any interest paid on the loan.

In the circumstance that you owe the company more than £10,000, you must treat the loan as a benefit in kind and deduct Class 1 National Insurance. You will also need to report the loan on your Self-Assessment tax return.

Accounts in credit

If the company owes you money, Corporation Tax is not due on the loan.

However, if interest is charged, this counts as a business expense for the company as well as personal income for yourself, you must report this in your Self-Assessment tax return.

Your company must pay you the agreed interest rate, minus the Income Tax charged. This may need to be reported every quarter through the CT61 form.  7

Do you have any queries about director’s loans? Seek advice today.