How to handle an overdrawn director’s loan account

As a director, have you ever considered taking a loan from your company?

If so, it’s important to be aware of the potential risks associated with an overdrawn director’s loan account (ODLA).

What is an ODLA?

An ODLA arises when a director takes a loan from the company, and the loan is not repaid in full. This can have several implications for both you and your company.

What are the corporate tax implications?

If the loan is not repaid within nine months of year-end, your company may receive a repayable Corporation Tax charge, under Section 455 of the Corporation Tax Act. This is calculated at 33.75 per cent of the outstanding amount.

While the loan remains unpaid or is yet to be repaid, interest will also need to be charged on the outstanding balance.

This can be repaid either by cash or by declaring dividends if there are sufficient profits and/or reserves.

What if the ODLA occurs in insolvency?

Having an ODLA when your company is facing insolvency or liquidation can lead to serious issues for the corresponding Director.

When a director’s loan account is overdrawn during insolvency, it signifies that the company does not possess sufficient reserves to clear the debt in its entirety.

This can occur if the company has been operating while insolvent, or if outstanding debt is greater than the company’s assets.

It is vital to ensure that the loan is repaid in full and on time, to avoid incurring any of these potential risks.

Are you facing an overdrawn director’s loan account and need advice? Contact us today.

Posted in Blog, SMEs.