< Go Back Director's Loan Accounts - avoid the risks Posted: Sep 13, 2019 Director's
loan accounts - avoiding the risks
HMRC
produce a series of toolkits which set out common errors that they find in
returns. The hope is that by being familiar with the mistakes that are
routinely made, steps can be taken to avoid them. Although the toolkits are
aimed primarily at agents, they are useful for anyone who has to complete a tax
return. The director's loan accounts toolkit highlights the key areas of risk
in relation to directors, loan accounts. The latest version of the toolkit was
published in May 2019 and should be used for personal tax returns for 2018/19
and for company returns, for the financial year 2018.
Personal
expenses
Expenses
are only deductible in computing taxable profits to the extent that they are
incurred wholly and exclusively for the purposes of the trade. A company is a separate
legal entity to the directors and shareholders. However, many close companies
meet director's personal expenses. Where these are not part of the director's
remuneration package, the company cannot deduct the cost when computing its
taxable profits. Instead, they should be charged to the director's loan
account. The director's loan account toolkit focuses on expenses that do not
form part of the director's remuneration package.
Risk
areas
1.
Review of the accounts - any personal expenditure incurred by the
director and paid for by the company must be allocated correctly, i.e. an
allowable expense where it forms part of the director's remuneration package
and charged to the director's loan account. Account headings should be reviewed
to identify director's personal expenditure which has not been treated
correctly.
2.
Loans to participators - under the close company rules, tax
(section 455 tax) is charged at 32.5% on loans to directors who are also
shareholders where the loan remains outstanding nine months and one day after
the end of the accounting period. Review overdrawn loan accounts to check
whether the company is liable to pay section 455 tax.
3.
Review of expenses and benefits - where a director is provided with
anything other than pay, it may need to be reported to HMRC as a benefit in
kind on form P11D. Review expenses and benefits for taxable items that may have
been missed. It should be noted that if the director's loan account balance
exceeds £10,000 at any point in the tax year, a benefit in kind charge will
arise on the loan unless the director pays interest at a rate that is at least
equal to the official rate (2.5% since 6 April 2017).
4.
Self-assessment - check whether the director needs to send a
self-assessment return. The directors' loan accounts toolkit states that "Company
directors do not need to send a tax return unless that have other taxable
income that needs to be reported, or if HMRC has sent a notice to file a return".
5.
Record keeping - good keeping is essential. Poor records may mean
expenditure is missed or allocated incorrectly.
Checklist
The
toolkit features as useful checklist which can be completed to make sure that
nothing is overlooked. The checklist contains a helpful link to HMRC guidance.
Partner
note:
Directors' loan account toolkit, see www.gov.uk/government/publications/hmrc-directors-loan-accounts-toolkit-2013-to-2014 .