Director Loan Accounts and Tax Returns: Where Businesses Get Caught
A letter arrives from HMRC. It names a figure, a tax year, and a loan the company accounts show quite plainly. Nothing about it was hidden. The director simply assumed that because the accountant had signed off the year-end figures, the story ended there. It had not. Somewhere between the company's books and the personal Self Assessment return, a detail failed to travel, and HMRC's systems noticed before anyone else did.
A director's loan account is not a single document. It lives in two places at once: the company's books, where every withdrawal and repayment is logged, and the director's own Self Assessment return, where certain events from that account are meant to reappear. In practice, these are two separate filings, prepared at different times, often by different people, and the gap between them is exactly where directors get caught out.
Two Records, One Loan
The company's accountant tracks the DLA through the year-end accounts and, where relevant, the CT600A supplementary pages of the Company Tax Return. This side of the record answers a narrow question: is the loan repaid within nine months and one day of the accounting period end, or does it trigger a Section 455 charge at 33.75% of the outstanding balance? HMRC's guidance on director's loans sets out this mechanism clearly, and most firms handle it correctly because it sits within their normal accounts preparation process.
The personal Self Assessment return is a different exercise entirely, usually prepared later, sometimes by a different adviser, and it depends on the director actively flagging what happened on the company side. Three events in particular need to travel from the DLA into the personal return, and this is where the record often breaks down.
Where the Two Returns Diverge
A written-off or released loan. Take a director with an overdrawn loan of £18,000 that the company simply writes off at year-end, perhaps because the business is winding down or the director's circumstances have changed. HMRC treats that £18,000 as if it were a dividend. It needs to appear on the Self Assessment return under dividend income, taxed at dividend rates, not quietly retired from the balance sheet. When the accountant preparing the company accounts does not flag the write-off explicitly, or the note gets lost between one adviser and the next, the dividend vanishes from the year-end paperwork and never resurfaces on the personal return at all.
A loan treated as a benefit in kind. Once an overdrawn DLA exceeds £10,000 at any point in the tax year, and interest is charged below HMRC's official rate, the shortfall becomes a taxable benefit, taxed in the same way as other benefits in kind. The company reports it on a P11D. The director then has to declare it again, separately, on their own return. A benefit calculated correctly on the company side is routinely dropped on the personal side, particularly where the loan balance shifts throughout the year rather than sitting still at one figure.
Interest paid the other way. Where a director lends the company money and charges interest on it, that interest is personal income, plain and simple, and it belongs on the Self Assessment return regardless of any P11D obligation. It is a modest sum next to the year's dividends and salary, which is precisely why it is the line most likely to be forgotten.
A director's loan does not become a tax problem when it is taken out. It becomes one when the story told on the company return and the story told on the personal return stop matching. Samantha Linggard - Linggard & Thomas Accountants
Why HMRC Notices the Gap
None of this is theoretical, and none of it requires an investigator to dig. HMRC has run targeted "one to many" letter campaigns aimed squarely at directors whose company accounts show loans over £10,000 with no matching entry on their personal return, as ICAEW's summary of the campaign sets out. Two filings already sit on HMRC's own systems, and a mismatch between them takes nothing more than a data match to surface. The directors who receive these letters are, almost without exception, the ones who assumed their accountant's sign-off on the company accounts closed the matter.
Keeping the Two Sides Aligned
The practical fix is less about tax planning and more about communication between whoever prepares the accounts and whoever prepares the personal return, particularly where these are not the same person.
Before a Self Assessment return is finalised, it is worth checking explicitly whether the company year included a written-off loan, a benefit-in-kind calculation on an overdrawn balance, or interest paid to a director, and confirming that each has actually carried through. A DLA that looks tidy in the company accounts is only half the job; the return has to tell the same story.
A tidy director's loan account on paper proves nothing on its own. What matters is whether the story it tells still matches the one on the return HMRC is quietly comparing it against.
Need Help Deciphering a DLA? We Can Help!
If you would like a second look at how your company and personal filings line up before that letter has a chance to land, get in touch with Linggard & Thomas today. We are experienced accountants working with businesses of various sizes on tax returns.
