By Julian Hall
DLA is an account on the Company financial records that reports transactions between the director and the Company. Monies withdrawn from the Company that are not repayments, wages or dividends will constitute a loan from the Company to the director, and in the event of the Company’s insolvency will form an asset of the Company. Amounts due to the director from the Company should be recorded in the Company’s books as a creditor while the amounts due from the director to the Company should be recorded as a debtor.
- Is my overdrawn DLA illegal?
No, Companies Act 2006 has removed the general prohibition on a Company making loans to directors. The rule has been replaced by the requirement to obtain prior shareholder approval. There are few exemptions when member’s approval is not required. As a general rule for loans of more than £10,000 shareholder approval must be given beforehand. Often a director is also a controlling shareholder so the approval is more formality rather than legal issue.
- Can I off-set an overdrawn DLA?
In a situation where the Company has two directors, for example, husband and wife, and one director owes money to the Company, whilst the other is owed money. In order to be able to offset these balances, the directors must formally agree in writing, with which the proper documentation must be kept, before any offset takes place.
- What are the tax implications on my overdrawn DLA?
If the DLA remains overdrawn nine months after the Company accounting period, section 455 Corporation Tax Act provides for a tax charge at the rate of 32.5% on the lower of the amount outstanding at the year end and nine months after the year end. This amount is payable even if the Company is making a loss and there is no corporation tax due.
Tax payable under section 455 is a temporary tax and it is repayable to the Company by HMRC nine months after the end of the accounting period in which the loan was repaid. Once the loan is repaid the tax effect is nil. However, the time lag between the loan being repaid and tax being refunded can place a significant strain on the Company’s cash flow.
Section 455 applies not only to a director’s loan account but to a loan to a participator of a close Company. HMRC define a participator as a person who has a share or interest in a Company.
- What is the Real Time Information System (RTI)?
The RTI was introduced in April 2013 which focused on salaries and wages being required to be reported to HMRC before payment is made. This means that if the payment has not been reported to HMRC as salary or wages then it cannot retrospectively be allocated as such. If the Company’s payroll records are incomplete then it may be necessary to make enquiries of HMRC as to salary payments reported to them under the RTI system.
- What are the potential ramifications of my overdrawn DLA if my Company goes into Liquidation?
The appointed Liquidator can demand that the director repays the amount owed to the Company in order to pay the Company’s creditors. The Liquidator can take legal action against the director or petition to make the director bankrupt.
- If my Company goes into Liquidation what information should I provide the potential Liquidation?
To calculate the amount of the DLA to be repaid it will be necessary to obtain the following information:
- The last set of full accounts;
- Bank Statements for the period from the date of the last balance sheet to the date that the account was closed referred to as the reporting period; and
- Payroll records for the reporting period
In order for the liquidator to conduct investigations in an efficient manner it is essential that this information be provided at the commencement of the liquidation.
- Final word regarding my DLA.
When the director borrows money from the Company, good record keeping is essential to ensure the right taxes are paid. The director should be aware that if too much money is borrowed and the Company is unable to pay its creditors, the Company might be forced into liquidation and the liquidator can take legal action against the director the enforce repayment of the debt.