- Paying Corporation Tax
- Completing and filing your Company Tax Return
- Records for Corporation Tax: what you need to keep
- Directors' loan accounts and Corporation Tax explained
- Appointing someone to deal with your Corporation Tax affairs
Directors' loan accounts and Corporation Tax explained
If you’re a company director or ‘participator’ and take money out of your company that's not a salary or a dividend - over and above any money you’ve put in - you’re classed as having received the benefit of a director’s loan.
If your director’s loan account is overdrawn, your company must pay tax on any amount you’ve not repaid by nine months after the end of your Corporation Tax accounting period.
This guide explains what a director’s loan is and the Corporation Tax implications for your company. It tells you if or when you need to inform HM Revenue & Customs (HMRC) that a director’s loan exists and explains how to fill in your Company Tax Return to account for any tax that's due.
It also mentions possible Income Tax implications of directors’ loans for you and your company.
On this page:
- What is a director’s loan account
- How a director's loan account works
- What is not a director’s loan for Corporation Tax purposes
- Paying off a director’s loan
- Corporation Tax implications of overdrawn directors' loan accounts
- How to account for directors’ loans on your Company Tax Return
- Reclaiming Corporation Tax after your director’s loan has been repaid
- Other tax implications of directors' loans
- More useful links
What is a director’s loan account
If you’re self-employed you can take business money out of your bank account at any time and use it as your own. The money is yours whether it's from a separate business account or from a combined business-personal account.
However, if you’re a company director (or other participator of a close company) and take money out of the business over and above any money you’ve put in, and that money is not a salary or a dividend, then the money is not yours - it belongs to the company. You’ve received the benefit of a director’s loan from your 'director’s loan account'. This loan is sometimes known to HMRC as a 'loan to participators'.
What is a participator in a close company
HMRC defines a participator as a person who has a share or ‘interest’ in a company. A participator is usually a shareholder who could also be a director. A participator includes any ‘associate’ - for example, spouse or civil partner, business partner, relative, trustee, or a loan creditor. A participator's interest in a company can be in its capital (for example shares) and/or in the income of the company.
HMRC defines a ‘close company’ for Corporation Tax purposes as a company that is controlled directly or indirectly by five or fewer participators - or any number of participators if they are all directors.
Please note that these are not necessarily the same definitions used by other HMRC tax areas (for example VAT), other government agencies (for example Companies House), or various accounting conventions used to prepare audited accounts.
How a director's loan account works
A director’s loan account can in practice be any form of account or bookkeeping entry - for example a loan account or a current account - or simply the fact that you have taken money out. If your company has other directors who use a directors’ loan account, you must keep separate company records for each loan account your company operates.
As a director of a company, you must manage your director’s loan account carefully, making sure you include all entries accurately and on time. HMRC may make enquiries about your director’s loan account as part of any Corporation Tax compliance check.
You lend money to your company: director’s loan account in credit
If you lend your company money (for example by paying money into your company’s bank account as opposed to, say, buying shares) your director’s loan account is in credit.
You can draw some or all of this money out at any time. There are no tax implications for your Company Tax Return.
Your company lends money to you: director’s loan account in debit or overdrawn
If you take money out of your company’s bank account over and above money you’ve loaned to the company - and that money is not a salary or a dividend - then it's a loan from the company to you. Your director’s loan account is overdrawn.
HMRC considers any such loan or advance drawn out of the business as a director’s loan whether or not you have set up any type of account in the company’s books.
A director’s loan account can include:
- cash payments other than your salary or dividend
- expenses that you may have paid for using company funds that are actually for personal use
- money withdrawn for your personal use - for example, to renovate your home, pay school fees or personal Income Tax
Your company’s accountant or auditor will normally transfer any such expenditure identified as personal from company expenditure to your director’s loan account.
What is not a director’s loan for Corporation Tax purposes
The following are not generally considered to be director’s loans for HMRC Corporation Tax purposes:
- certain small loans made to participators who are full-time working directors who do not have a material interest in the company
- loans made to participators for the supply of goods or services in the ordinary course of business, providing that your company doesn’t give more than six months’ credit or longer credit than it would normally give to customers
Paying off a director's loan
A director's loan can be repaid by:
- putting money into the company’s bank account
- the company crediting the director’s loan account with a payment - for example a dividend, salary or bonus
A director’s loan can also be considered repaid if the loan is:
- released by the company in a formal contractual procedure
- written off by the company where the company accepts that a loan (usually to a former director) cannot be recovered, and has given up trying to get it repaid
Find out more about paying off a director's loan
Corporation Tax implications of overdrawn directors' loan accounts
Whether your company has to tell HMRC that your director’s loan exists - and pay tax on the outstanding loan amount - depends on when the loan is repaid.
Strictly speaking this tax is not Corporation Tax. But in practice, you calculate the tax on your overdrawn loan on your Company Tax Return and add it to the Corporation Tax that's due. The section below shows you how to do this.
Your director’s loan account is paid off by the end of your company’s accounting period
If you pay off your director’s loan in full by the last day of your company’s Corporation Tax accounting period:
- your company does not pay Corporation Tax on the loan
- you don’t need to tell HMRC about the loan on your Company Tax Return
For example, your company’s accounting period runs from 1 April 2008 to 31 March 2009, and you pay off your director’s loan account on 30 March 2009. You don't need to include any information about this loan on your Company Tax Return.
Your director’s loan account is paid off within nine months of the end of your company’s accounting period
If your director’s loan account is overdrawn after the last day of your company’s Corporation Tax accounting period but you repay it in full within nine months:
- your company does not pay tax on the loan
- you must include details of that loan in your Company Tax Return
For example, your accounting period runs from 1 April 2008 to 31 March 2009. You pay off your director’s loan account on 30 September 2009. You need to include information about this loan on your Company Tax Return but you will not need to pay any tax on the loan.
Your director’s loan account is not paid off within nine months of the company’s year-end
If your director’s loan account is not paid off in full within nine months after the end of your company’s accounting period:
- you must include details of the loan in your Company Tax Return
- your company must pay Corporation Tax on the loan
- HMRC will charge interest on the amount unpaid
The current tax rate for director’s loans is 25 per cent of the outstanding loan.
For example, your company’s accounting period runs from 1 April 2008 to 31 March 2009. Your director’s loan account is overdrawn by £10,000 on 1 January 2010. You need to include information about this loan on your Company Tax Return. You should add £2500 (£10,000 x 25%) to how much Corporation Tax you must pay.
How to account for directors’ loans on your Company Tax Return
First you fill in supplementary page CT600A (Loans to participators by close companies). On this form you disclose any relevant directors’ loans and calculate the tax due, if any, on the loan(s). You then enter the amount of tax payable you've calculated in Box A13 of CT600A on to your CT600 Company Tax Return form in Box 79, and put an ‘X’ (not a tick!) in Box 80.
Box 79 ‘Tax payable under S419 ICTA 1988’ refers to the Income and Corporation Taxes Act 1988 section 419. This is the legislation that covers tax on directors loans.
The easiest way to do this is to fill in and file your Company Tax Return online. Alternatively if you file a paper return, you may be able to use the CT600 (Short) return form together with supplementary form CT600A. You can download CT600A from the HMRC website.
Corporation Tax Online: the benefits and how to sign up
Go to supplementary page CT600A (Loans to participators by close companies)
Reclaiming Corporation Tax after your director’s loan has been repaid
When you pay off a director’s loan on which your company has paid Corporation Tax, your company can reclaim that amount of Corporation Tax paid. HMRC calls this ‘claiming relief from the tax paid’.
When you can reclaim the Corporation Tax
Your company can reclaim any Corporation Tax paid nine months after the end of the accounting period in which the loan was paid off (or released or written off). However, the claim must be made within six years from the end of the financial year in which the loan is repaid (or released or written off).
Example
- Your company’s accounting period ended on 31 March 2008.
- Your company paid Corporation Tax of £2,500 on a £10,000 loan that was still outstanding on 1 January 2009.
- You repay this loan in full to your company on 1 March 2009.
You can reclaim this Corporation Tax any time after 31 December 2009. Your claim must be made by 31 March 2015.
How to reclaim the Corporation Tax
You do this on your Company Tax Return by filling in Part 3 of CT600A and informing HMRC you have paid off the director’s loan. How you do this depends on timing.
- If your claim is made within 24 months of the end of that accounting period you can amend and resubmit an amended Company Tax Return for that previous accounting period.
- If your claim is made more than 24 months after the end of the previous accounting period you can make a separate claim by writing to HMRC at the same time as you file your Company Tax Return for your most recent accounting period.
You may also be able to reclaim interest that was charged on the unpaid loan.
Other tax implications of directors’ loans
Overdrawn directors’ loan accounts
If your director’s loan account is overdrawn there may also be Income Tax and National Insurance implications for you and for your company.
Directors’ loan accounts in credit
If your company pays you interest on your director’s loan, there are Income Tax implications for you and your company.
You must show the interest you’ve received as income on your Income Tax Self Assessment tax return.
Your company must pay this interest to you only after withholding Income Tax at the basic rate - currently 20 per cent.
Your company must disclose these interest payments it has made to you and pay the Income Tax that it has collected to HMRC. You should use form CT61 to do this. Form CT61 and explanatory notes cannot be downloaded or ordered online. To order, please phone the Cumbernauld Accounts Office on Tel 01236 785 498.
Find out more about other tax and National Insurance implications of directors' loans
More useful links
Find your Corporation Tax Office
Find more information about Corporation Tax accounting periods
See a demonstration of Corporation Tax Online
