Documenting a director loan

Money moving between a director and a company needs an accurate explanation. It may be salary, a dividend, an expense reimbursement, repayment of money lent or a loan. The label should reflect the real transaction and the required approvals, not simply the description most convenient at year end. ^[1]

Establish which way the money moves

A director's loan account can show money owed by the director or money the company owes the director. Reconcile each movement with bank records and supporting documents. A single net balance can conceal transactions with different dates and tax consequences. ^[1]

Separate business expenses paid personally from personal spending paid by the company. Retain receipts and explain the business purpose where relevant instead of treating every payment as an undocumented advance.

Agree the terms before relying on repayment

Record the amount, borrower, lender, purpose, interest if any and repayment arrangements. Consider whether the loan is repayable on demand or over a defined period, and what happens if the director leaves or the company cannot pay.

Check whether board or shareholder approval is required under the law and the company's arrangements. A director involved on both sides should identify the interest and follow the applicable process. Directors' duties and conflicts need consideration even in a wholly owned business. ^[2]

Review the tax position early

HMRC explains that tax consequences depend on whether the account is overdrawn or in credit and on the individual's circumstances. The company may also have liabilities where the director is a shareholder or participator. ^[1]

Ask the accountant to consider the actual payment dates, balances, interest and proposed repayment. Do not assume that a brief repayment followed by a new withdrawal automatically avoids the relevant rules.

Maintain a loan evidence file

• Agreement or written terms.
• Required approvals and interest declarations.
• Bank evidence for advances and repayments.
• A reconciled loan account by transaction date.
• Interest calculations and relevant tax records.
• Year-end balance confirmation and outstanding actions.

Avoid retrospective relabelling

A dividend cannot simply be invented after the event to erase a problematic withdrawal. Its legality, available profits and decision process need separate assessment. Corrections should explain the true facts and the appropriate accounting treatment.

Reconcile the director's account transaction by transaction

Start with the opening balance and identify each payment to or from the director. Match expense reimbursements to evidence, salary to payroll records and dividends to their valid decision and financial basis. Amounts that do not fit those categories may need treatment as a loan, but the accountant needs the facts rather than a convenient year-end label.

Keep separate records for different directors. Combining personal transactions in one general directors account can hide who owes money and which approvals or tax questions apply. Where the company pays a personal bill, record the beneficiary and purpose promptly so the position can be assessed before the next reporting deadline.

Agree terms before the balance becomes contentious

For a genuine loan, identify borrower, lender, amount, interest, repayment and any security. Check the required company approvals and conflicts. A director borrowing from the company creates different questions from a director providing working capital. The direction of the debt should be obvious from the agreement and accounting record.

Use realistic repayment assumptions. If repayment depends on a future dividend, that dividend still needs an appropriate legal and financial basis when considered. Do not promise a distribution solely to make an overdrawn loan account disappear. Obtain advice on the actual tax and company-law position before relying on a proposed set-off or reclassification.

Monitor the balance during the year

Give the director periodic statements showing transactions and the closing position. Ask them to identify errors while supporting documents are available. A large unexplained balance discovered after year end can be much harder to resolve, particularly if the director has left or the company is experiencing cash pressure.

For an illustrative case, a director regularly uses the company card for mixed business and personal spending. The useful control is prompt categorisation and reimbursement where appropriate, not a retrospective statement that every payment was an expense. Supporting evidence should explain which costs belonged to the business and how personal amounts were dealt with.

Coordinate departure and financial distress questions

If the director leaves, include the loan account in the settlement and handover. Establish the amount agreed, any disputed transactions and the repayment terms. Where the company is financially distressed, obtain timely advice before making connected-party repayments or waiving amounts owed. Shareholder agreement alone does not resolve every legal concern.

Read Dividends and company decision records for the separate requirements of dividends. Board governance support can help with board approval and decision records, while the accountant or tax adviser should assess the loan's reporting and tax consequences.

For example, a director who pays a personal bill from the company account should identify it promptly. Recording the event and obtaining advice while the facts are clear is more reliable than leaving a growing unexplained balance for the accountant to reconstruct months later.