Director’s loan accounts are common in owner-managed companies. In simple terms, they keep track of money moving between a director and their company that is not salary, a dividend or repayment of a business expense.

They are perfectly normal when managed correctly. However, problems can arise where a director takes more money out of the company than they have put in. This is known as an overdrawn director’s loan account and it can result in unexpected tax bills.

Here are some of the main points directors should be aware of.

1. What is an overdrawn director’s loan account?

A director’s loan account is overdrawn when the director owes money to the company.

For example, this can happen if:

• you transfer money from the company bank account to yourself;
• the company pays personal expenses on your behalf; or
• you take money from the business that has not been treated as salary or a dividend.

These transactions may seem straightforward at the time, but if they are not dealt with correctly they can have tax consequences for both you and the company.

2. The company may have to pay tax on the loan

Irish tax rules contain special provisions where certain companies lend money to their shareholders or directors.

If these rules apply, the company may have to pay Income Tax to Revenue based on the amount of the loan.

Importantly, this tax is paid by the company even though the director has received the money.

If the director later repays the loan, the company may be able to reclaim the tax it previously paid, subject to Revenue’s rules and time limits.

This is one of the main reasons why an overdrawn director’s loan account should not simply be allowed to build up from year to year.

3. An interest-free loan can create another tax charge

There can also be a separate personal tax issue for the director.

If the company lends money to a director interest-free, or charges interest below the rate set by Revenue, the director may be treated as receiving a Benefit in Kind.

This means the director could have additional Income Tax, USC and PRSI to pay through payroll.

As a result, it is important to look not only at how much is owed to the company, but also at whether interest should be charged on the loan.

4. Make sure you know what each payment relates to

Good record keeping can prevent many director’s loan account problems.

Whenever money moves between you and your company, it should be clear what the payment relates to.

For example, is it:

• salary;
• a dividend;
• reimbursement of a business expense;
• repayment of money you previously put into the company; or
• a loan from the company to you?

Keeping this clear throughout the year makes it much easier to deal with the tax treatment correctly and avoids surprises when the annual accounts are being prepared.

There are also company law rules governing loans from companies to their directors and connected persons, so larger or unusual loans should always be discussed with your accountant or legal adviser.

5. Don’t leave an overdrawn balance unresolved

One of the most common mistakes is allowing a director’s loan balance to build up over several years without putting a plan in place to deal with it.

If you owe money to your company, it is better to review the position early.

Depending on the circumstances, options may include repaying the money, declaring a dividend where appropriate, processing additional remuneration or putting another suitable arrangement in place.

The right option will depend on your circumstances and the company’s financial position.

Keep your Director’s Loan Account under control

Director’s loan accounts are a normal part of many owner-managed businesses, but they need to be monitored carefully.

An overdrawn balance can result in tax being payable by the company, additional personal tax for the director and potentially company law issues.

At Gallagher Keane, we work with company directors and business owners to review director’s loan accounts, understand the tax implications and put an appropriate plan in place.

If you have an overdrawn director’s loan account, or are unsure about money you have taken from or put into your company, contact the Gallagher Keane team and we would be happy to help.