Reviewed 18th February 2020
When a director puts money into their company, whether at the outset or to fund a specific business asset, their loan account is in credit. If more money is withdrawn from the account than is available, however, it’s considered to be overdrawn.
The overdrawn amount must be repaid within nine months of the end of the limited company’s accounting period, and detailed records have to be kept of all transactions.
When you withdraw money from your company that isn’t salary or a dividend payment, you run the risk of triggering a benefit-in-kind if it’s not repaid in the timescale stated. If the amount withdrawn is £10,000 or more, you haven’t been charged interest on the loan by the company, and can’t claim a ‘qualifying purpose’ for the loan, there will be tax implications.
Your company will have to pay corporation tax on the amount of loan outstanding – this is then repaid to the company when the loan is paid off. You may also face a personal tax liability.
It’s important to seek professional advice on a director’s loan account if you’re unable to pay off the sum within the statutory timescale. We can help you manage the situation and avoid personal financial problems should your business become insolvent.
Operating an overdrawn director’s loan account might not be an issue – if you know you have sufficient funds to repay should the business encounter financial difficulty, for example.
But once a limited company enters a formal insolvency procedure, any money owed to the company will be called in by the administrator/liquidator for the benefit of creditors. This can place you at risk of personal bankruptcy if the amount is significant and you can’t afford to repay.
Additionally, the company isn’t allowed to simply write off the loan when it enters insolvency – if it does, the appointed office-holder has the power to reinstate the loan and you remain liable for its repayment. An overdrawn directors’ loan account is classed as an asset of the company and the appointed insolvency practitioner will want to recover this amount.
Our best advice is to seek professional help at an early stage so as many options as possible remain open to you in this situation.
It’s important to stay in control of your director’s loan account to avoid problems with HMRC and the Insolvency Service - should your company need to be liquidated, your conduct will be investigated to find out if you contributed to its downfall.
Our expert team at Scotland Debt Solutions has broad experience of helping directors to deal with problems and issues arising from operating an overdrawn DLA. If you’re pursued for repayment by an administrator or liquidator and you’re unable to pay, you may need to enter a personal debt procedure to manage the situation.
Unfortunately, if your debt levels are significant the only solution might be sequestration, which is the Scottish term for bankruptcy.
Scotland Debt Solutions helps Scottish companies and directors, and can advise on both corporate and personal debt remedies. We’ll quickly establish your overall financial position and that of your company, and explain your best options.
If you’re concerned about an overdrawn director’s loan account or need some guidance on the rules and regulations, we offer free same-day consultations at any of our offices around Scotland.
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Administration is an insolvency process that provides breathing space for companies struggling with debt, giving them the time needed to establish a plan going forwards. With several options potentially available at the end of administration, it’s an effective step for many businesses.
A Company Voluntary Arrangement (CVA) can help a company to escape debt by negotiating a formal payment plan with creditors allowing for reduced monthly repayments. Directors retain full control of their company during a CVA and the business is allowed to continue trading throughout.
When a limited company becomes insolvent, it’s important for directors to place the interests of creditors first and do all they can to minimise further losses. Creditors’ Voluntary Liquidation (CVL) is an insolvency process that allows this to happen, and ensures directors comply with strict insolvency laws.
Members’ Voluntary Liquidation (MVL) allows you to close your business and extract the profits in a tax-efficient way. It’s a process that’s available to solvent limited companies, and requires you to make an official Declaration of Solvency prior to commencement.
A Winding-up Petition is a legal notice presented to the court by a creditor with a view to forcing a company into liquidation. If a winding-up order is granted by the court, compulsory liquidation can take place very quickly, and this signals the end of the company.