Overdrawn Director’s Loan Account (DLA)

Yes. Once the loan has been repaid in full or part, the company can reclaim on the corporation tax on that part repaid.  The tax is repayable within 9 months from the accounting year ended in which the loan was repaid, and needs to be claimed within 4 years.

Yes. Once the initial loan has been paid in full, Directors are entitled to take out another director loan, with the approval of shareholders. However, there is a thirty-day cooling-off period during which no sum greater than a small amount can be borrowed. This is to restrict Director’s working around the rules by repaying the loan prior to year-end, only to borrow again soon after. This is known as ‘Bed and Breakfasting’. If there is a further borrowing soon after the Director has repaid the initial loan, it is considered to be a continuous borrowing to the initial loan withdrawal and charges to tax will be payable.

There is no legal limit to how much a director can withdraw from the company in a form of a loan. However, it is critical to withdraw an amount that is not at the detriment of cashflow.  If a director withdraws more than £10,000.00, this will be treated as a ‘Benefit in kind (P11D)’ and must be reported on the director’s self-assessment tax returns to HMRC. Tax would be applied on the loan. It is important to seek the approval of all the shareholders.

Associated loans are loans that Directors provide to associates such as connected entities, key management personnel or family and friends. Directors should be wary of making loans to other companies that they are connected with or loans to connected persons if there is no commercial benefit in doing so. An example may be a director advancing money to a newly formed business set up by a spouse or other family member which brings no benefit to the lending company and may affect its own cashflow position.

The Directors of the lending company could face criticism and personal financial loss if their company becomes insolvent and the loan cannot be repaid. The appointed Liquidator or Administrator could bring proceedings against the Director for Misfeasance as the loans made were not in the company’s best interest. This would form part of the Director’s conduct report that the Administrator or Liquidator is required to submit to the Insolvency Service. A subsequent director’s disqualification could result depending on the size of the loan and the effect it had on the lender.

The best defence is not to make the loan, but it is not uncommon for Directors of cash rich companies to offer assistance in helping family members or close friends set up new businesses. However, they need to be aware of the pitfalls if the debt becomes bad and their own company suffers as a consequence.  A means of protection would be to ensure that proper loan documentation is drawn up with a commercial rate of interest and an agreed repayment period. If possible, the loan should be secured by personal guarantees, supported by tangible assets and/or by taking a debenture in the new business.  A further defence might be to treat the advance as an investment in the new business so that it can be claimed that there was some commercial benefit to the monies advanced.  Depending on the size of the advance a board resolution should be approved in which details of the loan and the financial strength of the company should be considered, together with any details as to whether the company can claim any commercial benefit for the loan.