Tax & Accounting News
Overdrawn directors' accounts
04/12/2007
One of the most commonly encountered issues we have when dealing with
the Accounts of Limited Liability Companies is the question of director’s
accounts and the tax implications of being overdrawn.
When monies are taken by a director from the company, these payments
have to be treated as either:
1. Salary – which must be taxed under PAYE and is subject to
National Insurance when made available; or
2. Dividends – which must be approved by the members and paid
out of the existing profits of the company; or
3. A loan – which does not create and immediate tax charge, but
may do so if the total amount borrowed exceeds £5,000 at any
point in the tax year.
The legal rules covering transactions with directors have historically
been complex.
The Companies Act 2006 introduces some much needed clarification in
this area. There are currently no plans at all to simplify the tax
implications on such transactions.
A loan to a director may be made up of cash drawings, but also the
value of personal expenses the company has paid on behalf of a director.
To avoid these expenses being treated as benefits in kind, or as salary
payments and creating higher tax and National Insurance charges for
both the individual director and the company, the company may “lend” the
value through a director’s loan account in the company’s
books to be paid as expense incurred.
This loan can quickly lead to an overdrawn director’s account.
Where more than £5,000 has been borrowed, there will be a benefit
in kind charge on the basis the director has an interest free loan.
Tax will be required to be paid on the interest that should have been
paid on the loan, which is calculated at 6.25% per annum. This tax
charge applies where an individual has borrowed more than £5,000
for any period, whether five months or five years.
A loan made to a director should be cleared within nine months of the
company’s year end. If the balance remains outstanding after
this period of time, the company must pay an extra Corporation Tax
charge equivalent to 25% of the amount of the loan. The tax charge
will be set-off against the next Corporation Tax payment due after
the loan is finally paid. The tax charge on the company is in addition
to the benefit in kind charge on the director personally.
The rules do remain complex and advice should be taken before any monies
are extracted from a company by its directors.
If you would like any further information, please do not hesitate to
contact us.
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