Effect of Director's Loan on Corporation tax

 

 

Only directors’ loans which are not repaid to the company at the end of the company’s Corporation Tax accounting period need to be disclosed on the Company tax return to HM Revenue and Customs.

Any debit balance on the Director’s Loan Account that is outstanding when the accounting period finishes may increase your company’s Corporation Tax liability, depending on when the loan is eventually repaid.

The following three scenarios illustrate the implications.

 

You repay all director’s loan to the company before the accounting period ends

If you clear any overdrawn balance in your Director’s Loan Account before your company’s Corporation Tax accounting period finishes, you pay no Corporation Tax on the loan and you do not need to inform HM Revenue and Customs of the loan.

For example, your company's accounting period runs from 1 April 2008 to 31 March 2009, and you pay off your director's loan account on 30 March 2009. You don't need to include any information about this loan on your Company Tax Return.

 

You repay the loans within nine months and one day of the accounting period end date

If your company's Director’s Loan Account is overdrawn when your company’s Corporation Tax accounting period ends but you repay the loans within nine months and one day of the period end date, you pay no Corporation Tax on the loan, but you must declare the loan to HM Revenue and Customs on your company tax return.

For example, your accounting period runs from 1 April 2008 to 31 March 2009. You pay off your director's loan account on 30 September 2009. You need to include information about this loan on your Company Tax Return but you will not need to pay any tax on the loan.

 

You don’t repay a director’s loan within nine months and one day of the accounting period end date

If you do not repay a director’s loan within nine months and one day of the accounting period end date, you must declare the loan to HM Revenue and Customs on your company tax return, and your company must pay Corporation Tax on the loan, at a rate of 25%.

For example, your company's accounting period runs from 1 April 2008 to 31 March 2009. Your director's loan account is overdrawn by £10,000 on 1 January 2010. You need to include information about this loan on your Company Tax Return. You should add £2,500 (£10,000 x 25 per cent) to how much Corporation Tax you must pay.

HM Revenue and Customs will also charge interest on the unpaid amount – dated from nine months and one day from the end of the accounting period to the date on which the tax is paid or the director’s loan is repaid, whichever is earlier. The interest is non-refundable.

You cannot appeal against the company’s additional tax liability due to a director’s loan because the loan will be included on your company’s self tax return. It is also not possible to postpone collection of the tax.

 

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