Mark McLaughlin looks at the timing of receipts to directors’ loan accounts for the purposes of establishing the potential liability to tax and NI contributions.
An HMRC enquiry into the tax affairs of a family or owner-managed company will often involve some scrutiny of directors’ loan accounts (DLAs). HMRC recognises that DLAs are a potentially lucrative source of additional revenue under the ‘loans to participators’ provisions (CTA 2010, Pt 10, Chs 3-3B) and possibly as a benefit-in-kind on the director if a loan account is (or has been) overdrawn (ITEPA 2003, s 175).
HMRC will commonly ask for a detailed analysis of the DLA, showing the dates of debits and credits. Aside from the additional tax liabilities mentioned above, a DLA analysis may reveal (for example) failure to notify liability to a charge under CTA 210, s 455, ‘bed and breakfasting’ transactions, or failure by the company to apply PAYE at the correct time to bonuses credited to the DLA.
HMRC may issue an information notice if the DLA is not fully itemised and in chronological order and impose penalties for non-compliance. For example, in Matharu Delivery Service Ltd v Revenue and Customs  UKFTT 553 (TC)) the First-tier Tribunal (FTT) considered that where HMRC enquire into the tax affairs of a sole shareholder and their company, information about the nature, size and timing of payments between the company and the individual were ‘reasonably required’ by HMRC.
Establishing the proper timing of credits to the DLA is an important exercise from a tax perspective. The most common types of DLA credits are earnings and dividends to the director shareholders.
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