News

Director’s loans can be a useful tool for managing short-term cash flow between a company and its directors — but they’re not without risks. At Martin & Company, we believe that misunderstanding how these loans work can lead to unexpected tax liabilities, compliance issues, and even personal financial exposure. If you’re a company director, it’s vital to understand the rules and responsibilities involved.

What is a Director’s Loan?

A director’s loan occurs when you take money out of your company that isn’t a salary, dividend, or expense repayment — or when you lend money to the company from your personal funds. While these transactions are perfectly legal, they must be handled with care to remain compliant with company law and tax regulations.

The loan is recorded in the Director’s Loan Account (DLA), which tracks any money owed either to or by the director. Problems arise when directors withdraw funds that aren’t repaid within the required timeframe, or when proper records are not maintained.

Financial Risks and Legal Responsibilities

When a director owes money to the company, the loan must usually be repaid within nine months of the end of the company’s accounting period. If it isn’t, the company may face a surcharge under Section 455 of the UK’s Corporation Tax Act — or equivalent provisions in Ireland — currently set at 33% of the outstanding amount.

This surcharge is refundable once the loan is repaid, but it can tie up valuable cash and complicate financial planning. Additionally, loans left outstanding may be treated as income by tax authorities, potentially triggering personal tax liabilities for the director.

Another risk comes if the company becomes insolvent. Directors with overdrawn loan accounts may be required to repay the loan immediately, and in some cases, they could face legal action for wrongful trading.

Tax Implications You Need to Know

Unrepaid loans can attract a benefit-in-kind charge if they are interest-free or charged below market rates. This can increase your personal tax bill and create additional reporting requirements for the company. HMRC or Revenue may scrutinise the arrangement, especially if it appears to be a disguised form of remuneration.

Best Practice: Keep it Clean and Clear

To avoid issues, maintain accurate and up-to-date records of all transactions, repay loans within the allowable period, and always consult with your accountant before taking or issuing a director’s loan.

In summary, while director’s loans can offer flexibility, they must be managed responsibly. With the right planning and professional advice, you can stay compliant — and avoid turning a convenience into a costly mistake.

If you would like to discuss your business needs Call Martin & Company on 021 422 7240 or email info@martinandcompany.ie

For the latest business/practice news, taxation/financial resources and our Newsletter, visit https://martinandcompany.ie/