When your company goes insolvent, it’s possible that your director’s loan account may not be at the forefront of your mind. However, what may first appear to be a low-level issue, could soon spiral and cause serious repercussions if left unresolved.
Are you a director of a company, and do you utilise a director’s loan account? If so it is vital that you understand all of the implications that can arise should your business enter into liquidation and how it could affect you and your business.
What is a Director’s Loan Account?
A director’s loan account is money that you have taken from your company’s accounts that cannot be classified as an official outgoing (salary, dividends, expenses). It is money that a director borrows from the business with the expectation that they will eventually pay it back.
These loans are primarily used as a method to cover one off or short term expenses, such as unexpected bills or one-time/short-notice payments.
If you’re wondering ‘what is a director’s loan account and how could it benefit me’ it’s important to remember that it is not a personal piggy bank. Borrowing money from your own company, particularly for personal use, is an admin-intensive process that can come with great risks if undertaken incorrectly.
As a result, this type of loan should never be seen as a default, but instead should be reserved for emergency use when you have absolutely no other options.
What is an Overdrawn Director’s Loan Account?
An overdrawn director’s loan account means that you, for one reason or another, owe money to the business. A common reason that these accounts become overdrawn is if the company begins to face serious financial difficulties leading to liquidation. Once the company becomes insolvent, any money owed must be recovered and forwarded on to creditors.
Having an overdrawn account is not a major issue, for the most part. As long as you correct the balance (with interest) within nine months of the end of your accounting period, there will be no repercussions.
The issues are likely to arise only if the loan is not repaid within this nine month period, or the company begins to struggle financially.
How to Calculate Interest on Overdrawn Director’s Loan Account
One of the biggest benefits of a director’s loan account is that it makes it possible to borrow up to £10,000 without being liable to taxation. However, this only applies if the arrears are repaid within three weeks. After 21 days have passed interest will be charged , typically at the official rate currently set by HMRC (2%).
However, it is worth noting that, technically, it is up to the business to decide what interest rate it will charge on any directors loan. If the interest charged is lower than HMRCs typical rate, then any discount gained may be treated as a ‘benefit in kind’.
What is a Benefit in Kind?
Benefit in kind refers to any benefit handed out by a company to members of its team. This can include a company car, private healthcare, assets provided for personal use, non-business travel expenses, and more. It is required by law that you pay tax on any of these types of benefits.
A selection of potential benefits in kind that will lead to you likely needing to pay tax include:
- Company vehicles
- Private healthcare
- Assets provided for personal use
- Phones that have personal use
- Non-business travel expenses
However, not all company benefits will incur any tax. Examples of a few situations where you are unlikely to need to pay additional tax include:
- Free meals for staff
- Business related travel expenses
- Any business expenses paid for on the company card (this would not apply for things like fuel, parking, etc.)
- Uniforms
- Safety clothing/equipment
- Training
- Phone contracts for work mobiles
Consequences of an Overdrawn Director’s Loan Account During Liquidation
If you refuse, are unable to repay your account, or if it is proven that your borrowing of money from the company’s accounts is a significant reason for its financial situation, it is likely that consequences will follow. Those consequences can include notable tax penalties, fines, or disqualification as a director.
Should your company enter into liquidation, a liquidator will be appointed to your case. The liquidator will conduct a thorough investigation into the business — paying close attention to the conduct of directors, while attempting to uncover the root cause of the financial difficulties.
The list of consequences that can arise from an overdrawn director’s loan account during liquidation, should you fail to correct your account — or it is found that you are a cause of the insolvency — includes:
- Your business may be charged a corporation tax penalty at a set rate. The current rate is set at 32.5% of the loan amount
- National insurance implications for any accounts overdrawn over £10,000
- Income tax implications for accounts exceeding £10,000
- Potential fines for directors if they are deemed to have breached their fiduciary duties
- Possible disqualification as director
- If a director is deemed to have acted unlawfully, it is possible that this could result in a prison sentence
How Inquesta Can Support You in Liquidation
The role of a director is a difficult and often stressful one. With so much you need to be aware, and keep track of, it’s conceivable that things can slip from time to time. However, an overdrawn director’s loan account when your business is in dire financial straits is not something you should allow to fall down your list of priorities.
As mentioned above, failing to resolve an overdue loan account in liquidation can result in serious consequences for both you and your business — so it’s important that you do your research and get educated so you, as director, know exactly what is expected of you.
At Inquesta, we understand the pressure that is on you — the role of a director is often a thankless one. That is why we’re on hand to assist with a wide variety of issues. Whether you need support in cases of business recovery, administration, company voluntary arrangements (CVAs), and beyond, our team of licensed insolvency practitioners are on hand to provide an all-encompassing and holistic service.
Utilising our many years of experience, we have assisted company owners and directors from all manner of industries, assisting them with our wide variety of insolvency services.
From our very first contact, right through to reaching the required resolution, every single thing we do is with your best interests in mind. No matter what your issue, Inquesta can support and guide you into the future. Contact us today or request your free zero-obligation consultation to learn more about what we can do to support you and your business.