The director’s loan account (DLA) is an area where HMRC often finds errors, which can lead to significant tax liabilities. HMRC’s Director’s Loan Accounts Toolkit outlines common risk areas, offering a structured approach for keeping director-related expenses and loans compliant. Here are steps to help avoid pitfalls and maintain accurate records.
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Personal Expenses
Expenses are only deductible in computing taxable profits to the extent that they incur wholly and exclusively for the trade. A company is a separate legal entity to the directors and shareholders. However, many close companies meet the director’s expenses.
Where these are not part of the director’s remuneration package, the company cannot deduct costs when computing its taxable profits. Instead, the director’s loan account should get the bill. The director’s loan account toolkit focuses on expenses that do not form part of the director’s remuneration package.
Risk Areas With the Director’s Loan Account
- Review of the accounts – any personal expenditure incurred by the director and the company pays for it must be correctly allotted, i.e. an allowable expense where it forms part of the director’s remuneration package and invoice to the director’s loan account. Account headings should be reviewed to identify the director’s expenditure which has not been treated correctly.
- Loans to participators – under the close company rules, tax (section 455 tax) is charged at 33.75% on loans to directors who are also shareholders where the loan remains outstanding nine months and one day after the end of the accounting period. This updated section 455 tax rate came into effect in April 2022.
- Assessment of expenses and benefits – where a director gets anything other than pay, HMRC needs to know as a benefit in kind on form P11D. Analyze expenses and benefits for taxable items that may have been missed. If a DLA exceeds £10,000 at any point during the tax year, HMRC will assess a BIK charge unless interest at the official rate (currently 2.5% for 2023/24) is paid.
- self-assessment – check whether the director needs to send a self-assessment return. The directors’ loan accounts toolkit states that “Company directors do not need to send a tax return unless that have other taxable income that needs to be reported, or if HMRC has sent a notice to file a return”.
- Record keeping – good keeping is essential. Poor records may mean expenditure is missing or handout incorrectly.
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Checklist
HMRC’s toolkit includes a checklist that directors can use to verify compliance with reporting requirements and record-keeping standards. This checklist is essential for identifying any potential errors before submitting returns.
