32.5% Corporation Tax on overdrawn directors’ loans

07 Aug 2018

HMRC defines a director's loan as money taken from your company (by you or other close family members) that isn’t:

  • a salary, dividend or expense repayment and
  • money you’ve previously paid into or loaned the company

An overdrawn director's loan account is created when a director effectively 'borrows' company money. A record of these loans must be kept in a director's loan account (DLA). Small business owners need to be mindful that withdrawing funds from their company can have unwanted tax consequences for both the company and the director. The tax rules are further complicated if the value of the loan exceeds £10,000.

Where certain DLAs are not paid off within nine months and one day of the company's year-end there is an additional Corporation Tax (CT) bill of 32.5% of the outstanding amount (prior to April 2016 this rate was 25%). In most cases this is not a permanent loss of revenue for the company as a claim can be made to have this CT refunded (but not interest) when the loan is paid back to the company. It is important to ensure that the claim to have the CT refunded is made within 4 years after the end of the year in which the participator's loan was repaid.

Planning note

The use of DLAs as a means of extracting money from your company needs to be carefully considered with proper analysis of the tax impact for both the company and director. Please call if you need more information on this topic.

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JP qualfied in 2014, having worked for Grenfell James since 2007. He is a client manager for a diverse portfolio of clients including those in the manufacturing and serivce industries. 

 

Jon-Paul Lawrence

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"In the past we have been unfortunate to work with some less than reputable accountants. Grenfell James Associates have restored our faith in the accountancy business and assisted us with every aspect of our financial responsibilities. We now have a renewed confidence in our finances, knowing that all our affairs are being dealt with in an efficient and professional manner. Thank you to the whole team and we look forward to many years of working with you. "

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Paul Stanley. A S Contracts Ltd.

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  • 13, The Courtyard
    Timothy's Bridge Road
    Stratford-Upon-Avon
    Warwickshire
    CV37 9NP
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  • 7-8 Stratford Place
    Mayfair
    London
    W1C 1AY

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