Overdrawn director’s loan accounts_ A penalty problem
Overdrawn director’s loan accounts:
A penalty problem
What is an overdrawn Director’s Loan Account?
If payment is made to a director and it does not form part of their normal remuneration package (typically salary and dividends), the payment is usually set against their director’s loan account. Generally, the only other alternative would be to declare the payment is a bonus, but bonuses can be costly in tax and National Insurance.
If the director has a balance available on their director’s loan account, they can merrily draw down on their loan account with no tax implications or reporting requirements. It’s like they’ve got a bank account they can just dip into, provided the account remains in credit. However, once the available funds are exhausted, the director is in default and, therefore, a debtor of the company.
There is a potential trap concerning the late notification of overdrawn director shareholders’ loan accounts to HMRC where the overdrawn balance was repaid. There are statutory time limits for notifying charge ability to various taxes, including the tax charge that can arise when a company director shareholder’s loan account becomes overdrawn.
Don’t be late!
The general time limit for a company to notify chargeability to tax (where HM Revenue and Customs (HMRC) has not given the notice to file a tax return) is 12 months from the end of the accounting period ). Penalties may be charged if this deadline is missed.
Overdrawn loan accounts
The company is generally liable to tax (at a current rate of 32.5%) under the ‘loans to participators’ provisions in respect of the outstanding loan. Relief from this tax charge is available to the extent that the loan is repaid (or released or written off). If (for example) the overdrawn loan account is fully repaid before the normal due date for the company’s tax liabilities (i.e. nine months and one day after the end of the relevant accounting period) relief from the ‘section 455 tax’ can generally, be claimed without the tax being paid. However, if the loan account was repaid on or after the due date for the section 455 tax, relief is not available until nine months from the end of the accounting period in which the loan was repaid.
Is repayment enough?
It might be assumed that there is no need to notify HMRC of a section 455 tax charge if the overdrawn loan account has been repaid. However, this is incorrect; penalties can arise for failing to notify HMRC.