If you're a company director 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, and you're a participator (or an associate of a participator) as well as a director, your company must pay tax on any amount you've not repaid to the company by 9 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. The guidance for company loans will also apply if you're a participator who isn't a director and have an overdrawn loan or current account.
The guide tells you if or when you need to inform HM Revenue & Customs (HMRC) that a director's loan (or other loan) exists and explains what entries you need to include 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.
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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'.
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 5 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.
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.
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.
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:
Your company's accountant or auditor will normally transfer any such expenditure identified as personal from company expenditure to your director's loan account.
The following are not generally considered to be director's loans for HMRC Corporation Tax purposes:
A director's loan can be repaid by:
A director's loan can also be considered repaid if the loan is:
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.
If you pay off your director's loan in full by the last day of your company's Corporation Tax accounting period:
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 generally need to include any information about this loan on your Company Tax Return. But from 20 March 2013 you'll need to include it in your Company Tax Return if you either:
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 9 months:
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. But from 20 March 2013 you'll need to pay tax on the loan if you either:
If your director's loan account is not paid off in full within 9 months after the end of your company's accounting period:
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 £2,500 (£10,000 × 25%) to how much Corporation Tax you must pay.
As you are including the tax due on your directors' loans as part of your company's 'self assessment' of the tax it has to pay, you can't appeal against the amount that's due or ask HMRC to postpone collection of it.
First you fill in the Directors' loans section on your online CT600 form. This is the equivalent of the paper return supplementary page CT600A (Loans to Participators by Close Companies). In this section 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 in Box A13 on to your online CT600 Company Tax Return form in Box 79, and put an entry in Box 80. Your software package may do these calculations or carry forward your entries for you.
Box 79 'Tax payable under S419 ICTA 1988' refers to the Income and Corporation Taxes Act 1988 Section 419 - the legislation that covers tax on directors' loans. This legislation has now been replaced by Section 455 of the Corporation Tax Act 2010.
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'.
Your company can reclaim any Corporation Tax paid 9 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 4 years from the end of the financial year in which the loan is repaid (or released or written off).
You can reclaim this Corporation Tax any time after 31 December 2011. Your claim must be made by 31 March 2015.
For claims made up to 31 March 2010 a different time limit applied. Claims for those periods could be made up to 6 years from the end of the financial year in which the repayment was made.
You do this on your Company Tax Return by filling in the relevant boxes on the directors' loans online section and informing HMRC you have paid off the director's loan. How you do this depends on timing:
If you are making a claim in your return that reduces your company's Corporation Tax liability for an earlier period you must make sure you have put an 'X' in the appropriate box on the CT600 form. This will alert HMRC to your claim and they can process it correctly.
If your director's loan account is overdrawn there may also be Income Tax and National Insurance implications for you and for your company.
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. You can order form CT61 online.
To help you complete form CT61 correctly, HMRC has provided some guidance notes.
Where your director's loan is released or written off by your company, rather than being repaid, the amount released or written off is treated as your personal income. It's treated as net income received after the deduction of tax. If you pay tax at the basic rate, you won't have to pay any additional tax, but if you're liable at higher rates of tax then you'll have to pay the difference. You'll also have to pay any National Insurance contributions that are due.