Can You Write Off a Directors Loan Account?

In the realm of business financing, it is not uncommon for directors of limited companies to provide loans to their own companies. These transactions are recorded in what is known as a Director’s Loan Account (DLA). However, there may also be occasions when a director has a loan from the company. 

In this article, we will explore whether a Director’s Loan Account can be written off under UK accounting rules. We will discuss the tax and accounting associated with such a situation and what happens if a director wishes to write off this loan, raising questions about the feasibility and tax consequences of such a decision. 

So, if you have ever wondered whether as a director of a limited company ‘can I take a loan from the company and can that loan be written off?’ here’s the simple answer: 

Yes, you can write off a Directors Loan account, but it will depend on various factors, including the financial position of the company and the willingness of the directors to waive repayment. From an accounting perspective, if the company forgoes the loan and the director agrees, it can be treated as a write-off. However, it is crucial to consider the potential tax and accounting implications before making this decision.

So, the short answer is yes you can write off a director loan account but before you start pilfering the company bank account you need to get a firm grasp of the tax and accounting rules around such a transaction. 

Taking a loan from a company has many variables to consider, not all favourable and the timing of such transactions play a key role in whether this would work for you. Read on to find out how to write off a director’s loan account.

What happens if you write off a Director’s Loan Account?

When a Director’s Loan Account is written off, it essentially means that the Director is no longer obligated to repay the company. From an accounting standpoint, the outstanding loan amount is removed from the company’s balance sheet, reducing its assets. However, for tax purposes, there are potential implications to consider.

The loan must be formally waived as the liability will technically remain if the company just agrees not to collect the outstanding balance, so it is vital to have this documented, approved and signed by the Board of Directors. In most small businesses that might be you, but it still needs documenting.

If you are familiar with accounting entries, there are two sides to every transaction so the corresponding reduction in assets would be a cost to the profit and loss account reducing the profitability of the business and the availability of profits from which to pay a dividend. 

Will this impact your future personal requirements and the financial viability of the business? Make sure you are aware of your company director responsibilities before making such decisions.

There are various tax consequences of this approach to writing off a Directors Loan account which are discussed in more detail below. But to summarise if a director’s loan account is written off the amount is treated under Income Tax rules as a deemed dividend so the director will pay income tax on the loan write off the same as they would if receiving a dividend. 

So again, timing is important here. Which income tax year do you want that income to fall into? What is your level of taxable personal income already and will this write off push you into a new tax bracket.

HMRC will argue that writing off a loan comes under the definition of ‘emoluments from an office or employment’ and as a result will seek to collect Class 1 NIC from the company making a loan write off more expensive than voting a dividend on which no Class 1 NIC is due.

The company does not receive tax relief on the amount of the loan written off.

How do I clear my Director’s Loan Account?

To clear a Director’s Loan Account, there are a few possible approaches. Firstly, the director can repay the loan using personal funds or any other legal means. Secondly, the company can declare dividends to the director if they are also a shareholder, using the funds to offset the loan balance. Lastly, the director and the company can agree to write off the loan, as discussed earlier.

Examples of repaying a director loan account could be forgoing the cash settlement of business mileage and business expense claims perhaps offsetting the cash with the DLA instead.

As suggested above a dividend could be voted and not paid because the cash has already been received in the form of the loan. Be aware that the dividend will incur an income tax charge when you submit your self-assessment tax return. How will you pay for that? You can end up in a vicious circle taking further loans and dividends to settle the previous year’s tax bill. 

What happens if in subsequent years the company does not perform as well. Will it be able to vote a dividend to clear a Directors Loan Account? Using a DLA as a means of funding your day-to-day lifestyle would never be advisable.

What happens if you can’t pay back a Director’s Loan?

If a director is unable to repay a Director’s Loan, it can have tax implications. The outstanding loan amount may be subject to income tax and National Insurance Contributions (NICs) for the director, treated as employment income. 

Additionally, the company may face potential tax consequences, such as the application of the s455 tax charge calculated and paid as part of the Corporation Tax return.

The table below outlines the potential tax consequences of a director’s loan not being repaid.

Your personal and company tax responsibilities depend on how/if the loan is settled. You also need to check if you have extra tax responsibilities if:

• The loan(s) were more than £10,000 at any time in the tax year.
• You paid your company interest on the loan below the official rate.

This will need to be reported annually in the form of a P11D to HMRC. If paying interest below market rate the loan recipient has received a benefit in kind which needs reporting to HMRC. Income tax will need to be paid on the benefit in kind value and the company will pay Employer NIC.

	Your company’s responsibilities if you’re a shareholder and director	Your personal responsibilities when you get a director’s loan
You repay the loan within 9 months of the end of your Corporation Tax accounting period.	Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period.  If the loan was more than £5,000 (and you took another loan of £5,000 or more up to 30 days before or after you repaid it) pay Corporation Tax at 32.5% of the original loan. After you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest.  If the loan was more than £15,000 (and you arranged another loan when you repaid it) pay Corporation Tax at 32.5% of the original loan. After you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest.	No responsibilities if the loan(s) were less than £10,000 during the tax year and you paid interest at the market rate otherwise report benefit in kind on P11D and pay income tax.
You do not repay the loan within 9 months of the end of your Corporation Tax accounting period.	Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period.  Pay Corporation Tax at 32.5% of the outstanding amount, or 25% if the loan was made before 6 April 2016.  Interest on this Corporation Tax will be added until the Corporation Tax is paid, or the loan is repaid.  You can reclaim the Corporation Tax – but not interest.	No responsibilities if the loan(s) were less than £10,000 during the tax year and you paid interest at the market rate otherwise report benefit in kind on P11D and pay income tax.
The loan is ‘written off’ or ‘released’ (not repaid)	Deduct Class 1 National Insurance through the company’s payroll.  Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period.  You can reclaim the s455 Corporation Tax – but not interest.	Pay Income Tax on the loan through a Self-Assessment tax return.

Overdrawn Director’s Loan Account Example 1:

• Director: John Smith
• Company: XYZ Ltd
• Financial Year End: 31^st December

Date	Withdrawn	Repaid	Write Off	Balance	Tax	Accounts
31stDecember 2022				£0
1st January 2023	£9,000			(£9,000)
15th March 2023		£4,000		(£5,000)
30th June 2023	£6,000			(£11,000)	P11D 2023/24 as balance over £10k
10th August 2023		£2,000		(£9,000)
23rdDecember 2023			£9,000	£0	Class 1A NIC, Income Tax	Disclosure in accounts

No s455 charge due as loan was fully repaid or written off in the financial year.

A P11D will be due for the tax year 2023/24 as the loan account was higher than £10,000 during the tax year and no interest has been paid. The director will have this added to his taxable income and pay income tax and the company will pay employer NI on the value of the benefit in kind which is the interest value not paid.

Income tax will be due by the Director on the £9,000 written off at the rate of income tax for dividends in the tax year 2023/24.

The company is liable for Class 1A NIC on the £9,000 write off.

Transactions to be disclosed in the notes of the statutory accounts for the year ending 31^st December 2023.

Overdrawn Director’s Loan Account Example 2:

• Director: Dave Brown
• Company: ABC Ltd
• Financial Year End: 31^st March

Date	Withdrawn	Repaid	Write Off	Balance	Tax	Accounts
31st March 2022				£0
1st January 2023	£70,000			(£70,000)
15th March 2023		£30,000		(£40,000)	P11D 2022/23 as balance over £10ks455 tax charge for 2023	Disclosure in accounts
30th June 2023	£60,000			(£100,000)
10th August 2023		£20,000		(£80,000)	s455 tax charge for 2024	Disclosure in accounts
10th April 2024		£80,000		£0	P11D 2023/24 as balance over £10k
1st April 2026					Reclaim s455 charge
1st April 2027					Reclaim s455 charge

s455 charge due as loan was not fully repaid or written off in the financial year. At the 31^st March 2023 the balance was £40,000 so the s455 charge would be £13,000 (£40,000 x 32.5%) payable when the corporation tax is due 1^st January 2024.

s455 charge due as loan was not fully repaid or written off in the financial year. At the 31^st March 2024 the balance was £80,000 so the s455 charge would be £13,000 (£80,000 – £40,000 already paid x 32.5%) payable when the corporation tax is due 1^st January 2025.

A P11D will be due for the tax year 2023/24 as the loan account was £40,000 during the tax year and no interest has been paid. The director will have this added to his taxable income and pay income tax and the company will pay employer NI on the value of the benefit in kind which is the interest value not paid.

No income tax will be due by the Director as they have repaid the loan. If that loan was repaid via a dividend as opposed to personal funds, then they would pay tax on the dividend in the usual manner via the personal tax return.

Transactions to be disclosed in the notes of the statutory accounts.

s455 tax of £13,000 can be reclaimed on 1^st April 2026 which is 9 days and 1 month after the financial year in which it was repaid.

s455 tax of £13,000 can be reclaimed on 1^st April 2027 which is 9 days and 1 month after the financial year in which it was repaid.

Accounting disclosure requirements for director’s loan

Loans made to directors are required to be disclosed in the notes of the statutory accounts under Companies Act 2006 section 413 disclosing the details of any advance or credit granted by the company to its directors. 

The details required are the amount of the loan granted during the year, an indication of the interest rate, its main condition and any amount repaid or written off. 

In the notes to the accounts must also be stated the total amount of the loan and the total amount of interest charged. Disclosure for transaction with the directors is also required under FRS 102: Related Party Disclosures and FRS 105: Notes to the Financial Statements.

You or your company may have to pay tax if you take a director’s loan.

FAQs on writing off a directors loan account?

Directors loan account in credit write off?

In some cases, the Director’s Loan Account may be in credit, meaning the company owes money to the director. In such instances, if the director forgoes the debt and the company agrees, the credit balance can be written off. The company will still need to consider the tax consequences of this action, as it may result in taxable income for the company.

Consider keeping the account in credit should the company be able to repay it later. You could also convert the loan owed into share capital making the balance sheet of the business stronger. You would need to consider other shareholders in this decision.

Writing off a director’s loan account in credit will create a taxable income in the company on which corporation tax will be paid (unless the company has brought forward losses to offset) which could make this an expensive option. Perhaps the points raised above might be a better option.

Overdrawn Director’s Loan Account S455

When a Director’s Loan Account is overdrawn, meaning the director owes money to the company, certain tax rules come into play. In particular, the s455 tax charge applies, which is designed to prevent tax avoidance. The company may be required to pay this tax at a rate of 32.5% on the amount of the overdrawn loan if it is not repaid within nine months after the end of the accounting period.

Your company can reclaim the Corporation Tax it pays on a director’s loan that’s been repaid, written off or released. You cannot reclaim any interest paid on the Corporation Tax.

Claim after the relief is due – this is 9 months and 1 day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released. You will not be repaid before this.

You must claim within 4 years (or 6 years if the loan was repaid on or before 31 March 2010). This does not happen automatically so make sure you write to HMRC to request the repayment.

If you’re reclaiming within 2 years of the end of the accounting period when the loan was taken out, use form CT600A to claim when you prepare a Company Tax Return for that accounting period or amend it online.

Director’s Loan More than £10,000

If the outstanding balance of a Director’s Loan Account is more than £10,000, there are specific tax considerations. The director may face tax implications, as the loan can be treated as a taxable benefit, subject to income tax and potentially NICs. 

If you’re a shareholder and director and you owe your company more than £10,000 at any time in the year, your company must:

• Treat the loan as a ‘benefit in kind’.
• Deduct Class 1 National Insurance.

You must report the benefit in kind on a personal Self-Assessment tax return. You will receive a P11D from your company with the details of any taxable benefits. The benefit in kind is the cash equivalent of the amount of interest that would be payable at the HMRC official rate. 

A benefit in kind does not arise if the loan does not exceed £10,000 or the director pays interest on the loan at the HMRC recommended interest rate.

Tax on Director’s Loan

The tax treatment of a Director’s Loan depends on several factors. If the loan is not repaid within nine months after the end of the accounting period, the company may need to pay the s455 tax charge. 

If you’re a shareholder and director, your company must:

• Record interest you pay below the official rate as company income.
• Treat the discounted interest as a ‘benefit in kind’.

You must report the interest on a personal Self-Assessment tax return. You may have to pay tax on the difference between the official rate and the rate you paid.

What happens with an overdrawn DLA if the company goes into liquidation

The liquidator has the authority to request repayment from the director for the outstanding amount owed to the company, enabling the settlement of the company’s debts to its creditors. If necessary, the liquidator can initiate legal proceedings against the director or potentially declare bankruptcy for them.

To summarise, maintaining accurate records is crucial for directors who borrow funds from their companies to ensure proper tax payments. It is important for directors to understand that excessive borrowing, leading to the company’s inability to meet its obligations, could result in compulsory liquidation. In such cases, the liquidator has the power to take legal action against the director to enforce the debt.

Conclusion

While it is possible to write off a Director’s Loan Account under UK accounting rules, it is crucial to consider the associated tax consequences. The decision to write off a loan should be approached cautiously, with careful consideration of the financial implications for both the company and the director. 

As we have identified above using a director’s loan account temporarily i.e. it is going to be repaid can be advantageous if the director needs a short term loan rather than taking a dividend creating an income tax liability but if the loan is not repaid then the costs would be higher to the individual and business writing off the loan versus paying a dividend. The timing of such decisions is also crucial.

Consulting with a qualified accountant or tax professional is highly recommended to navigate the complexities and ensure compliance with relevant regulations.

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