The latest blog article from our Freedom in Numbers Sheffield Accountant team explores what happens if you have an overdrawn director’s loan account.
During the course of business, there may be a time where an unexpected cost (personally) arises, and you may need to borrow money from your business. We all have those days where the car needs repairing, or something needs replacing at home – it’s part of life.
When you borrow money from your business, this money is known as a directors loan, and in some instances may mean you drawing down on money you’ve already loaned the business, but in other instances where the business doesn’t owe you any money, it means you will need to pay it back.
If you withdraw money or pay for personal expenses using the company bank account that isn’t related to your salary, dividends or repayment of expenses, the money must be accounted for through your director’s loan account (DLA). But what happens if your business has an overdrawn director’s loan account?
What is a director’s loan account (DLA)?
Before we go any further, it’s important to explain what a director’s loan account actually is.
A director’s loan account is essentially a pot of money borrowed or lent to the company by the director which cannot be classified as salary, dividends, or the repayment of expenses. Think of it like another bank account, but it doesn’t sit with the bank, just within the company’s records instead.
This account records each withdrawal of cash and payment of personal expenses, along with any repayments of borrowed money that a director may make and any dividends paid.
Specific rules exist for repaying money, but if you have an overdrawn director’s loan account when your business enters liquidation, it can have serious consequences.
So, what happens if your director’s loan is overdrawn and what can you do about it?
What is an overdrawn director’s loan account?
When your DLA goes overdrawn, it means you officially owe money to the company. Generally speaking, this isn’t too much of an issue.
Instead, problems arise if your company begins to struggle financially and has to be liquidated.
If the business is struggling to stay afloat, you might assume the money you owe can be written off. On the contrary, your debt becomes an asset of the company that a liquidator will take efforts to recover.
A liquidator works on behalf of a company’s creditors and must recover money through the sale of assets and pursuit of funds owed to the business.
Overdrawn director’s loans in liquidation
The rules around overdrawn DLAs say that they must be repaid within nine months and one day of the company’s financial year-end.
If more than £10,000 is owed and isn’t repaid on time, you have to pay income tax on the outstanding sum, as HMRC would regard the withdrawal as income.
Therefore, it’s important to be fully aware of the balance on your DLA and to take the correct action if it becomes overdrawn straight away – before your business gets into financial difficulties. Consider it part of your crisis planning.
Note that it’s easy to let your director’s loan get out of hand – all it takes is a rough patch to take away your ability to pay yourself a salary and dividends, increasing your reliance on your DLA.
Repercussions of being unable to repay an overdrawn director’s loan
If you cannot repay the money you’ve withdrawn from your company, you will be forced into personal bankruptcy. After all, a liquidator works in the best interest of creditors, so they will pursue you through the courts to recoup the company’s funds.
Clearly, this is a very serious issue that should not be taken lightly or overlooked, as personal bankruptcy can threaten your personal assets and even your home.
The ‘veil of incorporation’ that provides protection for directors from personal bankruptcy for a company’s troubles is effectively removed, leaving you at great financial risk – and potentially with no income.
It’s not possible to write off an overdrawn director’s account. In fact, even if the company has written off your debt, the office-holder can reverse this action and make you personally liable.
That’s why it’s so important to seek professional advice about an overdrawn director’s loan account.
Contact our team of Sheffield Accountants
At Freedom of Numbers, we can tell you more about DLAs and the risk involved in borrowing money from your company. We’ll help you manage your debt and can even help you run the most fundamental aspects of your business, too.
Call us on 0114 400 0053 or fill out a quick questionnaire to get the advice and support you need to achieve your financial goals.