Cost of directors' loan accounts set to rise under new legislation

Despite such loans being generally promoted as a mechanism for providing payments against expected future dividends, they can sometimes pose significant personal financial risk to all directors if a company makes the loan when it is (or may be) insolvent, it fails to make sufficient profits, or fails to properly and lawfully declare dividends.

When it comes to the corporate insolvency of owner managed businesses, in all too many cases directors are found to have treated the company’s money as if it were their own. Loans made to directors or personal payments made for their benefit (or to their other businesses or family) are sometimes very poorly administered. These will often simply amount to ‘loans' or debts that are owed to the company.

All directors of a company making such loans and payments should monitor them carefully. The fundamental position is that loans to directors are void unless they fall within specific exceptions (such as being for less than £10,000 in total, if they are for qualifying reasons, or they have been properly authorised by appropriate shareholder resolutions).

Failure to repay such debts within nine months of the year-end triggers a tax charge for the company. This charge is not new, but the new rates will add to the cost of carrying unpaid loans and place a larger cash flow burden on the company until the loan is repaid.

Directors should also note that even a loan that falls within the exceptions (and is therefore permitted) should still only be permitted if, prudently, they consider it will be repaid.

Ultimately, if a loan to one director is not repaid, other directors may also be liable for breach of their directors’ duties and called on to pay the sums that were inappropriately advanced (to include the value of this tax charge).

For more information and guidance on the use and risks around directors’ loans, please contact Mark Cullingford or another member of Thrings' Insolvency team.

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