Director’s Loan Accounts: No Turning Back!

Many company owners have director’s loan accounts (DLAs), and generally understand how they operate. However, there are pitfalls for the unwary. These can sometimes result in tax and National Insurance contributions (NICs) liabilities for the company and/or themselves.

For example, an overdrawn DLA can give rise to a tax charge for a closely-controlled company under the ‘loan to participators’ rules (CTA 2010, s 455), a benefit-in-kind charge for the director under the beneficial loan provisions (ITEPA 2003, s 175) and a Class 1A NICs liability for the company.

It is therefore understandable that the attention of directors (and advisers) is often focused on the tax implications of loan account withdrawals, particularly in the context of overdrawn DLAs. However, care is also needed when crediting the loan account, such as with amounts representing earnings.

When are earnings ‘received’?

There are tax rules which determine that cash earnings are treated as having been received at the earliest of the following (ITEPA 2003, s 18(1)):

  • When payment is made of (or on account of) the earnings;
  • When the person becomes entitled to payment of (or on account of) the earnings; or
  • If the employee is a director and the earnings are from employment with the company, the earliest of:
    • When sums on account of the earnings are credited in the company’s accounts or records;
    • If the earnings for a period are determined by the end of that period, when the period ends; or
    • If the earnings for a period are not determined until after the period has ended, when the amount is determined.

There are different, but broadly similar, rules to determine when a payment of (or on account of) income is treated as made for PAYE purposes (ITEPA 2003, s 686(1)). For NICs purposes, there is also a charge on the earnings of an employed earner, and special rules for directors who are paid annually (SI 2001/1004, reg 8).

Reversing loan account credits

A director’s entitlement to earnings can arise under company law, or (for example) under the terms of a service agreement (which HMRC considers may be written, verbal or implied; see HMRC’s Employment Income manual, at EIM42300). Care is needed when crediting a DLA with an amount representing salary. If it becomes necessary to reverse the DLA entry, it does not necessarily follow that the tax and NICs attributable to the salary can also be reversed.

For example, in Ventura UK Ltd v Revenue and Customs [2017] UKFTT 585 (TC), the appellant company and a director (B) agreed that on 30 September annually his DLA would be credited with an annual salary of £16,000. HMRC inspected the company’s employer records and considered that the sums credited to B’s DLA represented earnings from employment, and were subject to PAYE and NICs by reference to the earlier of the date on which the sums were credited in the company’s accounts, or the date on which B became entitled to them. The company’s representative stated that as the sums credited to B had not been paid, all sums credited (£128,000 in total) would be reversed in the company’s accounts for a later year by way of prior year adjustment. This adjustment was subsequently made. However, HMRC’s view was that the annual sums had been accrued, and that any attempt to reverse the accrual by prior year adjustment was ineffective.

The First-tier Tribunal found that B was entitled to receive the annual fees, such that the company was liable for PAYE and NICs on the sums credited to him. Furthermore, the prior year adjustment included in the company’s accounts for the later year did not eliminate the liability. The prior year adjustment appeared to recognise that B was entitled to the payments. The company lost its appeal.

Thus it seems that the old adage ‘hindsight is a wonderful thing’ is a dangerous one for tax and NICs purposes when it comes to reversing DLA entries for salary. In Ventura, the tribunal concluded that the time of receipt rules (in ITEPA 2003, s 18) apparently meant that if the company had wanted to escape the PAYE (and NICs) charge, the director needed to have indicated that he did not consider the annual salary payable to him in advance of each accounts year end, before the vote for accruals in his favour, and before the entries in the company accounts.

Practical point

 It is also worth noting HMRC’s own guidance (at EIM42320), which includes the following examples of entries in accounts or records that are not yet earnings and therefore not ‘caught’ for tax purposes: (1) Draft entries in accounts and records (e.g. prior to agreement); (2) Contingent earnings (i.e. which are subject to a condition being met in the future); and (3) Provisions for future earnings that may be payable in the future but have not yet been agreed.

The above article was first published in Business Tax Insider in January 2018 (

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