Director's loan account

By Tolley
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The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Director's loan account
  • Tax implications for the company
  • Tax implications for the director
  • Dealing with overdrawn directors’ loan accounts

Proprietors often take loans from their companies. With some limited exceptions, loans from companies to their directors used to be prohibited under company law, however from 1 October 2007 following Companies Act 2006 (subscription sensitive), provided that shareholder approval is obtained, private companies are permitted to make loans to their directors.

The main tax implications of loans from companies to their directors are the possibility of a taxable employment benefit for the director and a 25% tax liability for the company if the loan is unpaid nine months after the period end. This is dealt with in more detail below, together with some ideas for dealing with directors’ overdrawn loan accounts (a common question in practice).

Tax implications for the company

A corporation tax charge arises if the employer is a close company and it makes a loan to a participator.

A close company is a company which is resident in the UK and is controlled by either:

  • five or fewer participators
  • any number of directors who are also participators

CTA 2010, s 439

A participator is a person who possesses, or is entitled to acquire, share capital or voting rights in the company.

CTA 2010, s 454(2)

However, the definition of participator is wide and also includes any loan creditor of the company and any person who is able to obtain distributions from the company or direct company income or assets for his benefit.

CTA 2010, s 454(2)

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