This article addresses the position where the director’s loan is overdrawn i.e. the director owes this money back to the company. There are many issues which the director and the company must comply with and we have drawn attention to the most pertinent ones below.
Income Tax charge under S438 for the company
If a balance remains outstanding on the director’s loan account at the company’s year end, this can lead to an income tax charge of 20% for the company. For example if there is a loan balance of €60,000 the total benefit is regrossed and treated as €60,000/80% = €75,000. The company must then pay €15,000 to the Revenue as an income tax charge.
If the Director repays this loan, the company can request a refund of this income tax payment from Revenue provided it is done within 4 years from the end of the year of assessment in which the loan is repaid.
Benefit in Kind for the director
An overdrawn director’s loan account can trigger a benefit in kind for the director. An overdrawn director’s loan account is effectively an interest-free loan and any benefit will be treated as Benefit In Kind and the company must operate PAYE / PRSI / USC on this benefit.
Tax implications if the loan is forgiven by the company
If the loan is forgiven by the company, the Director will be liable to income tax on the full amount of the loan. The company is not entitled to any tax deduction for the forgiveness of this loan.
Company law implications of an overdrawn Director’s loan
It is illegal for a company to loan more than 10% of its net assets to their Directors and if this restriction is violated, the Directors can be prosecuted by the Office of the Director of Corporate Enforcement (ODCE).
Record Keeping and Disclosure
Proper record keeping for each of the directors is necessary as poor records could result in the incorrect allocation of expenses/payments resulting in the precise taxes not being paid.
Furthermore, good records are important because disclosure of the balance on each overdrawn director’s loan account must be made in the company’s accounts.
If you are experiencing difficulties with director’s loan account, OMB, Chartered Accountants would be happy to discuss this article relevant to your situation.
