Directors’ Loan Accounts (DLAs): When is a Loan Truly Written Off?

Introduction
Directors’ loan accounts (DLAs) can be a complex area in the financial management of owner-managed and family companies. When these accounts become overdrawn, several tax implications arise, such as charges under the ‘loans to participators’ provisions. Benefit-in-kind charges for directors or employees, and income tax charges if the loan is released or written off. The key question often revolves around the timing and whether a DLA has truly been discharged. In this blog, we delve into the nuances of when a DLA is considered written off and the implications that follow.

The Importance of Timing

The timing of credits, repayments, or the writing-off of an overdrawn DLA is crucial as it determines:

• The date for repayment of any ‘loans to participator’ charge for the company.
• The tax year in which a beneficial loan income tax charge for the director is reduced or ceases.
• The tax year in which the DLA repayment, release, or write-off is taxable on the shareholder.

Common DLA credits include salary, bonuses, and company dividends. Let’s explore how each of these is treated for tax purposes.

Earnings

When it comes to earnings, specific tax rules dictate when cash earnings are considered received for employment income purposes and when a payment is made for PAYE purposes. HM Revenue and Customs (HMRC) recognizes that crediting a DLA in the company’s books can represent ‘payment’ for tax purposes. This is crucial for determining when the tax liability arises.

Dividends

Dividends credited to an overdrawn DLA require careful attention to ensure compliance with company law. This includes properly voting, paying, and documenting the dividend. For tax purposes, dividends are treated as paid on the date they become due and payable, unless otherwise specified.

• Final Dividends: These create an immediately enforceable debt once properly declared, unless a specific payment date is mentioned.
• Interim Dividends: These can be varied or rescinded before payment and are only considered paid when the right to draw on the dividend exists. Typically when the relevant entries are made in the company’s books.

The Case of DLA Write-Offs: A Real-World Example

In the case of Plumpton v Revenue and Customs [2024] UKFTT 367 (TC), the issue of whether a DLA had been written off was brought into sharp focus. The director-shareholder of a company, BGH, argued that his DLA had not been written off to avoid the resulting income tax liability.

BGH’s accounts showed that the amount owed by the taxpayer was written off in the tax year 2013/14, and the company reclaimed the tax previously paid on the overdrawn DLA from HMRC. However, the taxpayer’s personal tax return for 2013/14 did not reflect any income from the written-off DLA, leading HMRC to amend the return. Despite this, the First-tier Tribunal ruled in favour of the taxpayer, concluding that there was no concrete evidence. Such as relevant documents, showing that the DLA had indeed been written off.

Conclusion: Proving a DLA Write-Off

The Plumpton case highlights the importance of documentation and clear evidence in proving whether a DLA has been discharged. Companies and directors must ensure that all actions related to a DLA, including any write-offs, are properly documented to support their tax positions. Without this evidence, claims related to the discharge of a DLA may be challenged by HMRC. Leading to potential disputes and additional tax liabilities.

If you are dealing with an overdrawn DLA and considering its repayment or write-off. It is essential to maintain thorough records and seek professional advice to navigate the complexities of tax law. At Merranti Accounting, we can assist in ensuring that your DLAs are managed in compliance with HMRC regulations, helping you avoid unexpected tax issues.