HMRC Agent Toolkit for Directors’ loan accounts

Directors’ loan accounts can be causes of ‘hot boardroom friction’, especially if HMRC raise questions to the company’s accounts or directly to the Professional accountants responsible for producing the accounts.

This is a cause of friction between company accountants or City of London Company auditors, and their clients, and can sometimes spill over into other professionals like  external business advisers as well. Such is the sensitive and delicate issue of the use and management of directors’ load accounts.

HMRC helps with suggestions and makes proposals as to how to bypass stressful situations and cut out any accounting errors that leads to painful misunderstandings in a toolkit. HMRC  has produced an ‘Agent Toolkit’ for Directors’ Loan Accounts. It is unsure whether company directors can get access to them or whether they have to ask their accountants to give them one.

In the past couple of years financial institutions and merchant banks have restricted capital flow to small and medium sized enterprises as perceived risk has risen manifold and access to cheap money on the global financial markets has dried up.

The challenging economic and trading conditions of 2008-2011 have put pressure on many SME profit forecasts and results. The net effect is that some company directors have felt forced to allow their director’s loan account to become overdrawn.

This is a hugely emotive issue, since directors feel they have supported their businesses for years and now when the going gets tough they are being penalised for taking up some of the slack. However manipulating the Director’s Loan accounts can often complicate corporate and personal tax positions, with changes results in additional tax to pay.

HMRC developed a directors loan accounts agent toolkit to improve clarity, but it might be indicative of HMRC’s focus in the current climate.

The rules are set out in the Companies Act 2006 and Corporation Tax Act 2010  (CTA 2010), but key issues are highlighted below:

Directors’ Loan Account areas of concern:

Usually Directors’ loan accounts are maintained in credit i.e. most cases are when director’s are providing additional funds to the business, either voluntarily or as part of a business finance package e.g. match funding. Errors can arise when a company director views the company’s finances and his own finances as one and the same. What tends to happens then is that the director withdraws more than is allowed or has been allocated, leading to an effective overdraft i.e. a debit balance. A stipulation on company directors’ overdrafts in a directors’ loan account greater than £5k at any point during the year, where little or no interest is levied then it is described as a ‘beneficial loan’ and will need to be advised on the return using the HMRC form P11D.

Following s455 CTA 2010 additional tax may be due in situations where a continues to be un(re)paid more than 9 months after the company’s year end. Disclosure to Companies House.

Source: Accountancy Age