Director Loan Account! and its implication in Company's statutory accounts

If you are working in UK based firms, I expecting you to face DLA while preparing accounts especially for SME's.

So, let's discuss that what is this and for what purpose it usually use?

It is an account used to track financial transactions between a company and its directors or shareholders.

In many SMEs, especially those with closely held ownership structures, directors or shareholders may lend money to the company or borrow money from the company for various purposes. These transactions can include personal loans, advances, or other financial arrangements.

The Director Loan Account serves as a record of these transactions, tracking the movement of funds between the company and its directors or shareholders. The account keeps a detailed record of the amount of money owed by the company to the director/shareholder or vice versa.

Tax on Loans!

This depend upon the nominal position whether Is this in credit position (the company owes you) or debit position (you owes the company).

If it is in Debit position!

You need to check if you have extra tax responsibilities if:

• The loan was more than 10,000 pounds (5000 pounds in 2013 to 2014).
• You paid your company interest on the loan below official rate.

You repay the loan within 9 months of the end of your corporation tax accounting period:

You have to pay 33.75% on the overdrawn amount of Director Loan account at year end or 25% if the loan was made before 6th April 2016.

But you can reclaim corporation tax later if you pay the loan within 9 months of your corporation tax accounting period.

Although interest on the corporation tax cannot reclaim.

Entries in Final Accounts:

When the loan is provided:

Dr Receivables XXX

Cr Bank XXX

Still overdrawn at year end:

Dr S455 (Corporation tax Expense) XXX

Cr CT (Current Liability) XXX

If the overdrawn is settled within 9 months, so above entries will be reverse, which means that CT is reclaim but interest on corporation tax cannot be reverse.

You do not repay the loan within 9 months of end of your corporation tax accounting period:

Pay corporation tax at 33.75% of the overdrawn amount or 25% of the loan was made before 6th 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.

The loan is written off or released (not including if the company goes into liquidation):

Deduct the Class 1 National Insurance contribution through the company's payroll.

This is another topic which needs to be discuss in detail.

What if it is in credit position

Continue shortly!