What is a DLA?
HMRC defines a director’s loan as money taken from your company that isn’t either:
- A salary, dividend or expense repayment.
- Money you’ve previously paid into or loaned the company.
You record all other withdrawals in your DLA. The ‘account’ part of the terminology isn’t a physical account, its simply the record you need to keep of the money that you withdraw and pay into the company.
Each company director has to have their own DLA and retain records.
Broadly speaking the account should show the directors; cash withdrawals from the company and personal expenses paid with the company’s money or credit card, in addition any money paid back.
It is worth remembering also that business expenses must be incurred wholly, exclusively and necessarily for the purposes of the business, to attract corporation tax relief.
Directors Loan Taxes
The tax on a DLA is where it can get complicated and your obligations depend on whether you owe the company money (the DLA is overdrawn) or whether your company owes you money (the DLA is in credit), at the Company’s Corporation Tax Year end.
Your personal and company tax responsibilities change the longer you take to repay the loan.
Within nine months and one day of your company’s year-end
If your DLA is overdrawn at the date of your company year-end, you may need to pay tax. If you pay back the entire director’s loan within nine months and one day of the company’s year-end, the you won’t owe any tax. In other words, if your DLA is overdrawn at your company year-end of 30th June 2021, the loan must be paid back by 1st April 2022.
More than nine months after your company’s year-end accounting period
Where a DLA is outstanding at this point, the company will need to pay additional Corporation Tax at a rate of 32.5% on the amount outstanding, to HMRC. This is repayable to the company by HMRC when the loan is repaid to the company by the director. The repayment is not automatic and must be claimed and there is a delay in receiving this repayment from a cashflow perspective as this cannot be claimed until 9 months and one day after the end of the accounting period in which the loan was repaid. The clam must be made within 4 years from the end of the accounting period in which the repayment is made, or the loan is written off.
Bed and Breakfasting Rules
There are measures to prevent directors managing their DLA by way of repaying the money borrowed before the year end only to immediately take it out again with no real intention of paying it back.
When a loan in excess of £10,000 is repaid by the director, no further loan over this amount can be withdrawn within 30 days. When this happens, HMRC’s view is that the director doesn’t intend to pay the money back and the full amount will automatically be taxed.
The ‘bed and breakfasting’ of a loan which falls outside of the 30-day rule, may still be subject to tax where the loan is in excess of £15,000. The rules state that where a loan of over £15,000 has been made to a director of the company, and before any repayment is made there is an intention to take a future loan of more than £5,000 which is not matched to another repayment, then the bed and breakfast rules apply.
Therefore, if you make a repayment towards your director’s loan of more than £15,000 within 30 days, and intend to take a new loan of over £5,000 in the future, the ‘bed and breakfasting’ rules apply.
Written off DLA
If the Company writes off a DLA, then there are tax and accounting implications that need to be considered and advice should be sought.
For shareholders this can involve the amount of the loan written off being treated as distribution and taxed at the dividend rates of tax. Class 1 may also be payable.
For a non-shareholder the write off may be classed as employment income, reportable on form P11D and subject to income tax through the individual’s self-assessment tax return. Class 1 NIC may also be payable.
Responsibilities if you owe more than £10,000
If you owe more than this at any point in the year (interest-free), it counts as a benefit in kind and you will be required to pay tax on the benefit calculated, with the Company being required to pay Class 1A 1 NIC at a rate of 13.8% on the benefit calculated.
Your company needs to record it using form P11D and as an individual, you need to record the benefit on your Self-Assessment.
If your company charges you interest
If this interest is below the official rate, then this is recorded as company income and treated as a benefit in kind.
You report the interest on a Self-Assessment tax return you may have to pay tax on the difference between the official rate and the rate you paid.
If you pay the official rate of interest then no benefit in kind would arise.
DLA in Credit
A DLA may be in credit if you have put money into the Company for expansion i.e. you have paid for business expenses personally.
Your company doesn’t have a corporation tax liability but you might have some responsibility if you decide to charge interest on the funds effectively leant to the Company. That is because interest counts as:
- a business expense for your company – your company pays you interest minus income tax at 20 per cent, and reports and pays income tax each quarter using form CT61
- personal income for you – you report this on your Self-Assessment
You can draw on the balance in credit without any tax implications, but remember everything needs to be recorded.
As you can see there are many considerations with DLA accounts that should be considered to ensure accurate and timely disclosures are made and the tax implications are fully understood. There are also slight differences to consider within the rules dependant on whether the director is a shareholder or not.
For more information and if you would like to discuss your DLA position please contact your usual Streets contact or email firstname.lastname@example.org