Small business owners need to be mindful that withdrawing funds from their company can have a number of unwanted tax consequences; this includes paying personal bills as well as withdrawing cash. It is quite common for small company accounts to show an overdrawn position on a director’s loan account. A DLA overdraws if a director takes out more money that he is entitled to; rather like being overdrawn on your bank account.
This situation can create a number of implications for both the company and the individual director as detailed below.
Corporation Tax charge
If the director’s loan account is not paid off within nine months and one day of the company’s year-end the company will have to pay a corporation tax charge based on 25% of the overdrawn balance at the accounts year end. This amount is recoverable when the loan is subsequently cleared (but there will be some delay in being able to actually receive this sum).
If a director’s loan account is overdrawn by more than £5,000 then the company needs to calculate the benefit of the loan account to the director and submit a form P11d requiring the director to pay income tax on the cash equivalent of the loan. The ‘cash equivalent’ is the interest that would have been paid using the official HMRC rate (less any interest actually paid).
The company will also have to pay a Class 1A national insurance charge once the overdrawn amount is in excess of £5,000.
If you have any queries or would like further advice regarding this topic, please do give us a call.
John Elliott, Tax Partner