Tax implications of an overdrawn director's loan account

Published: 23/04/2019 By Thomas Agyapong

Distributions made in excess of distributable reserves are not lawful as they are not compliant with Companies Act 2006.

Where the director/participator “knows or has reasonable grounds for believing” all or part of the distribution was unlawful they are liable to repay the unlawful amount to the company.

The unlawful part of the dividend(s) will be recognised in the company’s financial statements as amounts due from the directors/participators.

The unlawful dividend is treated as a loan made and Corporation Tax section 455 applies.

If the unlawful part of the dividend(s) is not repaid within 9 months of the end of the accounting period in which the distributions were made, a section 455 corporation tax charge may arise.

If the participator is also an employee (including employed directors) the amount shown in the accounts as due from the employee is a loan.

The company may have p11d reporting obligations and a Class 1A NIC liability on the loan. The employee may also have an income tax liability on the cheap loan.