Directors’ Loan Accounts and Section 455
Directors’ Loan Accounts (DLAs) are common in owner-managed businesses and can be a practical way for directors to move money between themselves and their company. Used carefully, they offer short-term flexibility. Used casually, they can create significant tax exposure for both the company and the individual director.
This article explains how DLAs work in close companies, when the Section 455 charge applies, the personal tax implications for directors, and the compliance risks that often surface during HMRC enquiries or insolvency.
Close companies and why they attract special tax rules
A close company is broadly a UK-resident company controlled by five or fewer shareholders, or by any number of shareholders who are also directors. Control is not limited to share ownership alone. Anyone with a financial stake in the company can be treated as a participator, including loan creditors or individuals entitled to assets on a winding-up.
Close company status matters because HMRC applies additional anti-avoidance rules designed to prevent directors from extracting value without paying the appropriate tax. Loans to directors are a key focus area.
What is a Directors’ Loan Account?
A Directors’ Loan Account records transactions between a director and the company that fall outside salary, dividends, or reimbursed business expenses. Common entries include:
- Personal payments made from the company bank account
- Use of company funds or cards for non-business costs
- Cash introduced by the director to support the business
Each director normally has their own running balance. Where the company owes the director, the account is in credit. Where the director owes the company, the account is overdrawn.
Accurate record-keeping is essential. DLAs must be properly reflected in the company’s accounts and corporation tax return. Poor documentation can result in amounts being misclassified, overlooked tax charges, or increased scrutiny from HMRC.
When Section 455 applies
Section 455 of the Corporation Tax Act 2010 applies where a close company makes a loan or advances value to a participator and that loan remains outstanding nine months and one day after the end of the accounting period.
If the balance is not cleared by that deadline, the company becomes liable to a temporary tax charge calculated on the outstanding amount. For loans made on or after 6 April 2022, the rate is 33.75%. The charge is payable by the company and is reported through the CT600A.
Although often described as refundable, the charge represents a real cash cost until the loan is genuinely cleared. Any interest charged by HMRC on late payment of the Section 455 liability cannot be reclaimed.
Timing is therefore critical. Clearing the balance within the statutory window avoids the charge altogether. Missing the deadline can create cash-flow pressure, particularly if the loan is substantial.
Clearing a loan and reclaiming the charge
Relief from Section 455 becomes available once the loan is permanently repaid or otherwise cleared in a way that triggers a tax charge on the director. This can include repayment in cash, replacing the loan with taxed salary or a properly declared dividend, or formal write-off.
Relief is claimed in the accounting period after the loan is cleared. There is no automatic offset, and delays in repayment can mean the company waits some time before recovering the tax.
Personal tax exposure for directors
DLAs do not only create company-level risk. Directors can also face personal tax consequences.
Beneficial loan charges
Where an overdrawn loan exceeds £10,000 at any point during the tax year and interest is not charged at HMRC’s official rate, the director is treated as receiving a taxable benefit. The benefit is calculated on the notional interest and reported through the P11D, with the company paying Class 1A National Insurance.
Charging interest at or above the official rate, and ensuring it is actually paid during the tax year, can reduce or eliminate this exposure.
Loan write-offs and releases
If a director’s loan is written off or formally released, the amount is generally taxable on the director. In close companies, this is typically treated as a distribution and taxed at dividend rates.
Where HMRC considers the loan to be employment-related, it may argue for earnings treatment instead, bringing PAYE and Class 1 NIC into play. The distinction often depends on whether the loan arose in the director’s capacity as a shareholder or as an employee, and the facts can be closely examined.
Anti-avoidance rules to be aware of
HMRC pays close attention to repayment patterns. Simply clearing a loan shortly before the nine-month deadline and then borrowing again can be ineffective.
- The 30-day rule disregards repayments followed by further borrowing within a short period
- The arrangements rule applies where there is an understanding that funds will be re-drawn, even outside the 30-day window
Recent changes to the Targeted Anti-Avoidance Rule have also tightened the rules around loans involving connected or associated companies, particularly where loans are moved within group structures to sidestep the charge.
Artificial or circular arrangements carry a high risk of challenge.
DLAs in liquidation or administration
In an insolvency, an overdrawn DLA is an asset of the company. Office-holders are under a duty to investigate and pursue recovery where appropriate, often assessing the director’s personal means.
If a loan is formally written off or released, this can trigger a personal tax charge for the director. Insolvency does not, of itself, remove the tax consequences. Where recovery rights are retained, the position may differ, but clear documentation is crucial.
DLAs are routinely reviewed in insolvency scenarios and are frequently one of the first assets examined.
Practical risk management
The most effective way to manage DLA exposure is ongoing discipline rather than year-end fixes. Key steps include:
- Reconciling DLAs regularly, not just at year-end
- Monitoring balances throughout the year
- Charging and paying interest where required
- Planning early for clearance of overdrawn balances
- Avoiding informal or undocumented movements of funds
- Seeking advice before restructurings or insolvency
Leaving matters until deadlines approach significantly increases both tax risk and stress.
Final thoughts
Directors’ Loan Accounts can be useful tools in owner-managed businesses, but they sit squarely within HMRC’s compliance focus. Section 455, beneficial loan rules and the tax treatment of write-offs all operate together, and the consequences can escalate quickly if balances are not actively managed.
Insolvency adds further complexity, with DLAs often becoming a central issue for both office-holders and HMRC. Clear records, timely action and professional advice are essential to prevent manageable positions from becoming costly disputes.