This version of the toolkit is applicable for financial years commencing 1 April 2017 for company tax returns, and the risks have been reviewed and updated where necessary for 2017-18.

It provides a checklist of actions for agents and advisers to take when assessing directors’ loan accounts, plus a list of risks, together with mitigations, explanations and examples in a number of areas.

HMRC says it is important that any personal expenditure incurred by the director and paid by the company is allocated correctly. Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes should be paid. Where the expenditure does not form part of the remuneration package the relevant amount should normally be debited to the director's loan account.

A review of particular accounts headings may identify directors' personal expenditure that has not yet been allocated appropriately. Transactions should normally be recorded as they occur and a detailed transaction history maintained, so that it is possible to identify the director's loan account balance on any given date.

A company may not correctly distinguish non-business transactions such as payments made to or on behalf of the directors (directors' personal expenditure) from business transactions. This may result in non-business expenditure being claimed as an expense in the profit and loss account instead of debited to the directors' loan accounts, or directors' benefits not being properly returned on form P11D.

Payments made to or on behalf of directors or their family or household that are contractual, rewards for work done or are payments for future work are normally considered to be employment income. If such payments are posted to the director's loan account when they are in fact part of the remuneration package this can result in an underpayment of tax and National Insurance contributions (NICs) and an incorrect loan account balance

If the company makes payments to, or on behalf of, the directors for their personal bills, and these payments do not form part of their remuneration package, these should normally be debited to the appropriate director's loan account.

Directors' bonuses, dividends and salaries etc. may be credited to the directors' loan accounts. Where such credits are made to the loan account the amount or timing of the credit may be incorrect, for example a director's bonus should only be credited when paid or deemed to be paid. PAYE and NICs should be operated on earnings at the same time and therefore only the net amount should be credited to the loan account. Where there are credits for other items such as use of the director's home or business expenses paid personally, it is important to ensure that the amount reflects the actual or apportioned expense.

If transactions are not posted at the time they occur, for example if they are only posted at the year end, an overdrawn balance during the year may be overlooked. Overdrawn loan accounts may constitute a beneficial loan which should be returned on form P11D.

Where a close company makes a loan or advance to a director (who is also a participator) in the company or to an associate of a participator (normally the individuals who own shares in the company and their relatives), the close company is due to pay tax under S455 Corporation Tax Act 2010. If S455 tax is not paid on the overdrawn amount this can result in an underpayment of tax. The rate has increased from 25% to 32.5% for loan made to or benefits conferred on participators on or after 1 April 2016.

If a loan chargeable to tax under S455 Corporation Tax Act 2010 is repaid more than nine months following the end of the accounting period in which the loan was made, relief under S458 Corporation Tax Act 2010 is not due until nine months after the end of the accounting period in which the loan is repaid. For repayments made on or after 20 March 2013 relief may also not be due if S464C Corporation Tax Act 2010 applies, because the repayment is made shortly before or after a further loan is made or is otherwise linked by arrangements to another loan. There are also specific arrangements for temporary loans.

Normally each director has a separate loan account; indeed each director may have more than one account. Where there are separate accounts for individual loans/indebtedness each account should be considered separately for S455 purposes even where the loans are to the same person. The position, however, is different if the facts show that there is genuinely a joint account. HMRC advises it would, though, be unusual to find two directors operating a genuine joint account unless they are spouses, civil partners or otherwise closely related individuals.

If an employer provides a director or employee with anything other than pay it may have to be reported as an expense or a benefit. The type of expense or benefit and the way they are provided can affect the tax and NICs to be paid and the reporting requirement. Some expenses and benefits, although not liable to tax or NIC, may still need to be reported. Therefore errors can arise and it is important to consider all of the facts surrounding expenses paid or benefits.

Directors' Loan Accounts Toolkit 2017-18 Company Tax Returns is here.

Report by Pat Sweet