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Director Loan Accounts
Date: 3rd June 2013
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HMRC are clamping down on overdrawn Director loan account balances.
If you are a Director of your own Limited Company then you will probably already be familiar with the term “Directors loan account” which is effectively the Directors personal “bank” account with the Company. As long as this balance remains in credit there are no issues. However, if the account balance becomes overdrawn then this could result in a Tax consequence for both the Company and the Director personally.
However, if any overdrawn loan account balance is repaid in full within 9 months of the Companies accounting year end, then any Tax consequence for the Company can be avoided. In some cases, this would result in the Director repaying the loan account right at the end of the permitted 9 month period (usually from personal funds which may have resulted in a personal overdraft arising) but then repaying themselves back from Company funds a few days later. This is an arrangement commonly referred to as “bed and breakfasting” and one that HMRC have now sought to stop from happening.
Accordingly, they have now introduced 2 new rules:
> the 30-day rule.
> the intentions and arrangements rule.
The 30-day rule affects situations where the Director repays more than £5,000 of the money borrowed from the Company but, within 30 days, re-borrows more than £5,000.
The intentions and arrangements rule will apply where a Director owes £15,000 or more, makes a full or part repayment of the balance but does so in the knowledge/intention that the money will be re-borrowed from the Company.
As always, the devil is in the detail and this post does not cover the detailed criteria relating to these new rules. Therefore, if you think that you may be affected by these changes or want to know more about how these new rules may affect you then please get in touch.