HMRC Targeting Directors’ Loan Accounts

For many small business owners and company directors, utilising a Director’s Loan Account (DLA) is a common practice in managing a company. Whether it’s temporarily withdrawing funds to cover personal expenses or lending money to the business to boost cash flow, directors frequently depend on this flexible arrangement to manage their finances effectively.

However, what was once viewed as routine is now under the close scrutiny of HMRC. The tax authority has launched a campaign targeting directors who may have had loans written off or released but failed to declare them correctly on their tax returns.

If you’re a company director or shareholder, it’s crucial to understand how HMRC views directors’ loans — and what you can do to stay compliant while minimising tax exposure.

Understanding the Director’s Loan Account

A Director’s Loan Account records money transactions between a company and its director that aren’t classed as salary, dividends, or reimbursed business expenses. Essentially, it shows how much the company owes the director — or how much the director owes the company.

Here’s how it typically works:

• The company owes the director: When you pay business costs personally or inject funds into the company, it creates a credit balance in your favour.
• The director owes the company: When you take out cash or have personal bills paid by the business, this creates a debit balance — effectively a loan from the company.

Suppose the account is overdrawn at the end of the accounting period, meaning you owe the company money. In that case, HMRC will expect the situation to be dealt with appropriately — either by repayment, dividend, or another taxable adjustment.

HMRC’s Current Focus: Directors’ Loans from 2019 to 2023

Recently, HMRC has been writing to directors who had loans written off or released between April 2019 and April 2023. The aim is to identify whether any income from these loans was missed from Self Assessment tax returns.

The letters encourage directors to:

• Amend their 2023/24 tax return if income was omitted.
• Use the Digital Disclosure Service if undeclared income relates to earlier years.

This campaign is part of HMRC’s wider effort to close the tax gap associated with small and family-run companies. By using data analytics and cross-checking company accounts with personal returns, HMRC can easily identify cases where a director’s loan appears overdrawn but no related income has been reported.

If you’ve received such a letter, it’s essential to act promptly but carefully. Before making any disclosures or amendments, you should seek professional tax advice to ensure the correct position is declared.

How Directors’ Loans Affect Your Tax

HMRC’s letters mainly address personal issues, but directors’ loans can also impact Corporation Tax, Income Tax, and National Insurance. It’s important to understand how these areas connect to avoid unexpected tax charges.

1. Corporation Tax and the Section 455 Charge

If your company is what HMRC defines as a “close company” (usually one controlled by five or fewer shareholders), loans to directors or shareholders can trigger a Section 455 tax charge.

This rule applies if:

• The loan remains unpaid nine months and one day after the company’s year-end.

In such cases, the company must pay a temporary Corporation Tax charge at 33.75% of the outstanding loan. While this tax can be reclaimed once the loan is repaid, it ties up company cash in the meantime.

There are a few exceptions. No Section 455 tax is due if:

• The loan is under £15,000.
• The director works full-time for the company.
• The director owns less than 5% of the company’s shares.

Even if you qualify for these exemptions, accurate record-keeping is vital. HMRC frequently checks company accounts for repeat or large overdrawn balances, which often trigger further review.

2. Employment Benefit: The Beneficial Loan Charge

If the company provides an interest-free loan or below HMRC’s official rate, it can be treated as a taxable benefit in kind.

This happens when:

• The total loan exceeds £10,000 at any time during the tax year, and
• The interest charged is below HMRC’s official rate of interest (currently set to rise to 3.75% from 6 April 2025).

When this applies:

• The director must pay Income Tax on the difference between the official rate and the interest actually paid.
• The company must report this as a benefit in kind on a P11D form and pay Class 1A National Insurance on the value of the benefit.

Even short-term or informal loans can fall into this category if the balance crosses the £10,000 threshold — so monitoring loan amounts throughout the year is essential.

3. Writing Off or Releasing a Director’s Loan

If a company writes off or releases a director’s loan, the written-off amount counts as income for the director. In most small companies, this is treated as a deemed dividend — taxable at the director’s dividend tax rate.

However, HMRC can argue that it represents salary or earnings instead, especially if proper procedures aren’t followed. That would mean PAYE and National Insurance would also apply — a far worse outcome.

To avoid this, the write-off must be:

• Formally approved by shareholders in a board meeting.
• Properly documented with a legal loan waiver or deed of release.

These steps clearly show that the transaction is a dividend distribution rather than remuneration, ensuring the correct tax treatment is applied.

Why HMRC Is Paying More Attention to Directors’ Loans

In recent years, HMRC has invested heavily in technology that enables it to identify mismatches between company accounts and personal tax returns.

For example:

• If a company’s accounts show an overdrawn director’s loan but the individual’s tax return doesn’t report a corresponding dividend or benefit, it raises a red flag.
• HMRC’s data-matching software can automatically detect such inconsistencies, prompting a compliance check or enquiry.

This increased capability means director-shareholders are more exposed than ever. Even innocent oversights — such as late dividend paperwork or informal loan write-offs — can result in HMRC investigation letters, penalties, and additional tax bills.

What to Do If You Receive a Letter from HMRC

If you’ve received a letter about your director’s loan account, here’s how to handle it safely and effectively:

1. Please do not ignore it: Failing to respond could escalate the issue and lead to penalties.
2. Review your records: Check your company’s accounts to verify the amount and nature of the loan.
3. Check your tax return: Confirm that any written-off or released loan was declared correctly as dividend or employment income.
4. Seek professional help: A tax specialist can assess your situation, determine whether income needs to be disclosed, and help you respond to HMRC appropriately.
5. Keep documentation: Ensure all board minutes, resolutions, and waiver deeds are in order to support the tax treatment you’ve applied.

Addressing the issue early and correctly can prevent penalties and demonstrate cooperation to HMRC, which often leads to a more favourable outcome.

How Tax Accountant Can Help

At Tax Accountant, we specialise in helping company directors and shareholder-managed businesses navigate the complexities of director’s loan accounts.

Our team can:

• Review your DLA for exposure to HMRC scrutiny.
• Manage Section 455 tax planning to avoid unnecessary charges.
• Recommend the most tax-efficient methods for clearing overdrawn balances.
• Assist with HMRC correspondence, disclosures, or enquiries to protect your interests.

Whether you’ve received a letter or want to make sure your director’s loan account is compliant, our experienced accountants can help you manage it efficiently and with confidence.

HMRC’s focus on directors’ loan accounts is part of a broader trend: greater transparency and tighter enforcement for small companies. If your DLA isn’t managed properly — or if loans are written off informally — you could face unexpected Corporation Tax charges, personal tax liabilities, and even penalties.