Directors’ loan accounts and Corporation Tax explained

If you’re a company director or ‘participator’ 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, your company must pay tax on any amount you’ve not repaid by nine months after the end of your Corporation Tax accounting period.

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, dividend or reimbursement for a business expense, 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’.

You lend money to your company: director’s loan account in credit

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.

Your company lends money to you: director’s loan account in debit or overdrawn

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.

Overlap profits on commencement of trade

A business commences on 1 October 2012. The first accounts are made up for 12 months to 30 September 2013 and show a profit of £45,000.

The basis periods for the first 3 tax years are:

 

2012-2013 Year 1 1 October 2012 to 5 April 2013
2013-2014 Year 2 12 months to 30 September 2013
2014-2015 Year 3 12 months to 30 September 2014

If the profits for 2012-2013 are computed by an apportionment using the number of days in the relevant periods, the taxable profit for 2012-13 is £45,000 x 187/365 = £23,054.

Audit threshold

A company is treated as small (or medium-sized) if it does not exceed more than one of the following criteria:

Small Medium-sized
Turnover £6.5 million £25.9 million
Balance sheet total £3.26 million £12.9 million
Average number of employees (on a monthly basis) 50 250