What is a directors' loan account used for?
The directors’ loan account is where you keep track of all the money a director lends to a company or from it.
A directors’ loan is common in companies, and there is usually no issue when the company owes a director money. However, a director taking a loan from the company can have legal and tax implications. Because a Limited Company is a separate legal entity, exercising caution and seeking professional advice before withdrawing from the company is essential.
This guide explains the implications of directors lending money to the company and the company lending money to the directors.
Can a director loan money to the company?
A directors’ loan is a frequently used method for a company director to provide funds to their company at the start-up stage, during challenging times, or during expansion.
At the outset, a director may lend the company a sum of money, e.g., €10,000, to cover company formation Ireland costs and initial set-up fees and enable the company to start making sales.
Once the company establishes and earns money, it can repay the director the entire loan without tax implications.
When would a director loan money to the company?
During negative cash flow
To fund company growth
To settle debts
When is a directors' loan, not a loan?
If a director lends money to a company without written evidence, the payment will be considered a loan only if proven in court. The company will repay the directors’ loan only after settling the amounts owed to other parties, with the directors’ loan being the last in the repayment ranking.
Do you pay tax on a directors' loan?
Neither party has tax implications in the case of a loan from the director to the company.
On the other hand, there are tax implications for both the director and the company when a director owes money to the company at year-end. These loans are generally not encouraged as they incur higher interest charges than if the director obtained a loan from a bank.
Can a company loan money to a director?
Suppose the company makes any payments to a director that is not their salary, not part of their remuneration package or not considered a tax-deductible expense. In that case, the payments must be treated as a loan from the company to the director.
Generally, companies are not allowed to provide loans to their directors. However, a 10% exemption specifies that the loan’s value must be less than 10% of the company’s relevant assets.
10% Rule
The company must ensure that it does not breach the 10% rule, as doing so may result in fines and penalties for the director and make them personally liable for all the company's debt.
Implications of a company lending money to a director
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Interest is charged on a loan owed by a director
Even if a company does not charge interest on the loan, the director will still have to pay interest at 4% (if used to purchase a home) or 13.5% (all other loans). The director must pay the interest via a director's Income Tax Return.
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What happens if the company waives the loan?
If the company writes off the loan, the written-off amount will be assessed as the director's income and subject to income tax.
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Income tax (the company is liable)
The company has to include the directors' loan as a part of its Corporation Tax Return and pay tax at 25% of the loan amount before the deadline. If the loan is repaid within four years, the company can request a refund of the income tax paid.
How can we help?
A directors’ loan can be an effective way to infuse cash into a company. However, exercising caution and seeking professional advice before taking or making a loan is essential. This is particularly important when the company or director is experiencing financial difficulties. By understanding directors’ loans’ legal and tax implications, companies and directors can make informed decisions about their finances and cash flow management and ensure compliance with relevant regulations.
Our team of chartered and certified accountants are on hand to support your business and answer your queries – reach out to us today.
Henry is a certified Chartered Accountant (ACA) and Accounting Team Manager at Accountant Online, specialising in annual accounting services, bookkeeping, tax, and payroll services for micro and small companies in Ireland, Northern Ireland and the UK.
Henry has vast experience in modernising and supporting businesses to embrace online bookkeeping and reporting online using digital systems. He expertly guides business owners to have better cash flow management by facilitating the creation of cash flow forecasts, robust financial models, and management accounts.