The scope for mistake in relation to directors is high and as such review of directors’ loan accounts can provide rich pickings for tax inspectors during the course of a compliance check. This article identifies some of the high risk areas and the steps than can be taken to reduce the risks of getting it wrong.
Expenses
Are there any categories of expenses that could include non-business expenditure? These should be reviewed so personal expenses can be correctly identified and either charged to the director’s loan account or disclosed on the return of benefits and expenses (form P11D).
Employment Income
Has the director’s employment income been treated correctly for tax and National Insurance contributions (NIC) purposes? Payments made to the director as a reward for work done normally constitutes employment income of the director and is subject to PAYE and NIC. If the payment is credited to the loan account, PAYE and NIC may be overlooked.
Personal Bills
Have personal bills paid by the company (such as credit card bills or utility bills, for example) that do not form part of the director’s remuneration package been debited to the loan account? The accounts and directors loan accounts should be reviewed to ensure that such items have been treated correctly.
Timing
Have transactions been posted to the director’s loan account at the time that they occur? Delays in posting items to the loan account may mean that an overdrawn balance is overlooked. An overdrawn balance during the year may (depending on the amount) constitute a beneficial loan which needs to be returned on the P11D. Action is also required where the loan account is overdrawn at the year end (see below).
Credits to the Account
Have credits to the directors’ loan account been treated correctly? Consider the nature of any credits to the loan account and whether they have been treated correctly for tax and NIC. PAYE and NIC are due when fees or bonus’ are voted to the directed and credited to the director’s account. However, no tax or NIC is due where dividends are credited to the account. However, the dividends must be properly declared on the director’s personal tax return and any associated tax paid.
Withdrawals From the Account
Have any withdrawals from the director’s current account been treated correctly? No tax or NIC is due on withdrawals from a director’s current account if it is in credit. However, action may be required if it is overdrawn (see below).
Overdrawn Accounts
Is the account overdrawn at the end of the year? If the company is closely controlled, has this been disclosed (now on the director’s loan account section of the online CT600)? If the overdrawn balance has not been repaid within nine months and one day of the year end, corporation tax is payable on the loan at a rate of 25%. This can be reclaimed when the loan is repaid, although not until nine months and one day after the end of the accounting period in which the loan was repaid.
Loans Written Off
Have loans which have been waived or written off been treated correctly? Loans written off are treated as the personal income of the director, which has suffered tax at the basic rate.
Practical Tip
More guidance on the treatment of directors’ loan accounts can be found on the HMRC website. HMRC also produce a toolkit for agents and advisers to help them avoid common mistakes (see www.hmrc.gov.uk/agents/toolkits/dia.pdf).
By Sarah Bradford
