Companies are often funded by loan from directors; which is either willingly done or when other sources of finance are hard to come by. Either way, directors loan to company are technical accounting issues with many legal and tax pitfalls. So before you make a loan to your company as a director, make sure you get a tax and legal advice to overcome any future issues.
You will have to verify your company’s Articles of Association to see if it is legal to borrow money from any of your company directors and what terms and conditions have to be considered regarding these loans if they are allowed. Given your company articles of association allow loan from directors you should draw up a directors loan Agreement that mentions date, size of loan, interest rate and repayment schedule. This should be a formal legal document and you will do better if you contact a small business accountant regarding it.
Directors loan is not restricted to lending money to a limited company. It can take form of equipment, product or services or forgoing monthly salaries. Whatever form a directors loan takes, your company accounts should maintain a separate director loan account. Every loan from a separate director should be recorded in a separate loan account. Each loan will be recorded as a credit entry in directors loan account and will be summed up with other current liabilities in balance sheets and other annual statutory accounts. There will be no corporation tax due on loans from company directors.
It is up to director’s discretion whether or not he/she wants to charge interest on the directors loan to company. Any interest, if charged will be accounted for as personal income for the said director and should be included in his/her annual self assessment tax returns. Income tax will be deducted from the interest payment to directors at 20% and must be paid to HMRC on quarterly basis by filling out form CT61.
If you need any help in drawing out directors loan to company agreement template, you can Contact Certax Fitzrovia Ltd. We are professional Accountants and tax consultants that deal with companies of all sizes.
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