The implications of writing off an overdrawn directors’ loan account

While Insolvency Practitioners can be both commercial and flexible (if appropriate) when dealing with overdrawn directors loan accounts (DLAs), we’re still seeing examples of directors not being fully aware of the consequences of DLA write-off. Following the introduction of the Criminal Finances Act 2017 earlier this year, and a seemingly more focused approach from HMRC, it is of paramount importance that you and your clients are receiving the correct advice before deciding upon a formal insolvency option.
Once a DLA write-off has been crystalised (i.e. the Insolvency Practitioner is in receipt of the final contribution from the director) an income tax charge will be triggered. Historically it has been the responsibility of the individual director to declare this on their personal tax return. Over the last couple of years, however, we have noticed increasing levels of attention paid by HMRC to this in order to ensure the correct income tax charges have been declared and applied. The Criminal Finances Act 2017 extends the burden of correct categorisation of DLAs to the company accountant.
Example
We were recently introduced to the director of an insolvent business by the company accountant for a second opinion. The director had previously met with another insolvency practitioner who had correctly recommended the company should enter formal insolvency proceedings.
However, the director was unaware that if he formally agreed to partially repay his overdrawn DLA, the amount written off would be subject to an income tax charge. The accountant was also unaware of his responsibility to ensure that any expenses had been correctly categorised in arriving at the total DLA figure.
From the outset, your clients should be receiving the advice they need to hear, as opposed to what they want to hear from. Make contact with us as early as possible if you are unsure as to the options available to your clients and the consequences of those options.

This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.