Effective immediately, HM Revenue & Customs (HMRC) have introduced a new rule in regards to directors’ loan accounts.
Directors’ loan accounts allow a company director to withdraw money from their company in surplus of a salary or a dividend. The amount can be over any money the director has put in, however tax is accrued on the sum withdrawn if not repaid by nine months after the end of the corporation tax accounting period.
As per the new rule change, if a director’s loan account is overdrawn, the company must pay 25 per cent tax on any amount they have not repaid within nine months after the end of the corporation tax accounting period. This is to stop companies making untaxed loans to their directors as opposed to paying salaries or dividends, which are subject to tax.
In essence, directors’ loans balances that may have avoided a taxable rate of 25 per cent in the past will no longer be able to in the future.
The new rule carries a level of complexity with it; therefore it is advised that companies who believe they might be affected by the change follow these steps:
- Get your books and records to your accountant as soon as possible after your year end
- If funds are normally withdrawn prior to a future dividend, consider voting a quarterly/monthly dividend in advance, so that your loan account is always in credit
- Your accountant can conduct a tax planning exercise to avoid any potential tax problems
- Keep all paperwork, especially if it is new – your accountant will compartmentalise all receipts and dividend vouchers
- Ask your accountant to prepare quarterly management accounts.