Director’s Loan Account (DLA)

We have been speaking to many directors over the past few months about Directors Loan Accounts (DLA). We have provided below some important things to take into consideration:-

• As a director you can both withdraw and lend money to your business, the way in which these transactions are recorded is called a director’s loan account (DLA). The transactions do not include salaries and dividends.

• A DLA for the purpose of your annual accounts, relates to the money you have lent or withdrawn from the Company.

• DLA’s can become very complex and so it is very important that company directors understand exactly how these transactions work. Make sure that you take expert advice. Taking money from your business as a DLA is often recommended by accountants. If no money has been withdrawn, your DLA will have a balance of zero. If you have taken money out of the business then it will become overdrawn (until such time that the dividends taken are then worked out, at the end of the accounting period) it can then become a more complex matter.
• If your DLA becomes overdrawn, you will need to ensure to follow certain protocol to avoid any tax related issues. If you withdraw money from the company that cannot be classed as salary or dividends and this amount is more than you have actually paid into the same account, it becomes overdrawn. The best way to remedy this situation is to work out a plan whereby you ensure to repay the money within nine months of your company’s financial year end and again speak to your accountant.

• HMRC regard this transaction as an interest-free loan and you will be expected to pay income tax on this (if you still owe this money by the end of the tax year). To avoid any problems, it is better to keep the total amount borrowed under £10,000.

• Whilst the use of a DLA may be acceptable for a solvent company (where the assets are more than the liabilities) , the game changes dramatically in the event of insolvency (where the assets are less than liabilities). Directors need to be very careful with the way in which the DLA is calculated, as any Insolvency Practitioner (IP) will analyse the amounts and will demand that any overdrawn balance is paid back.
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• The Insolvency legislation (both the Act and Rules), provide the IP with various resources to look into overdrawn DLA, together with any other transactions the company may have entered into in the past. The IPs duty is predominantly to make sure that creditors receive some repayment of their debts, so the maximum realisation of assets becomes the key function.

• It is important for Directors to be aware of the potential risks they face, in the event that their company may become insolvent.  The director’s potential exposure to claims can go as far back from the moment they ought to have known that the Company was unable to pay its debts as and when they fall due. There are time limits on certain transactions which the IP can pursue but it is better to be safe than sorry.

             Next Step

If you want to find out anything further about this topic then please feel free to call me on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com

This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.