The director's loan account: three problems wearing one name

By Peter Edwards ACMA CGMA · Chartered Management Accountant in practice

On many owner-managed balance sheets, the director's loan account is the largest single number nobody can fully explain. It grows quietly — a transfer here, a card payment there, an opening balance inherited from a previous bookkeeper — until one day it's five or six figures and the honest answer to "what is this?" is a shrug. In a pre-engagement review, that shrug is the finding.

The reason a big DLA deserves suspicion is that the account is a name, not a nature. Three genuinely different things end up filed under it, and they carry entirely different consequences.

1. Genuine director funding

The director really has lent the company money, or drawn against what they're owed. Legitimate — but it still needs to be evidenced: when, how much, on what terms, and ideally a written loan agreement. An overdrawn DLA (the company lending to the director) is where the tax consequences bite: a company tax charge on loans still outstanding after the corporation tax due date — repayable when the loan is — and, for larger interest-free balances, a benefit-in-kind on the director personally. The rules are mechanical; the problem is almost always that nobody can say what the balance actually is.

2. The dumping ground

The commonest reality: the DLA has become where unexplainable payments go. Personal costs paid from the business account, transactions the bookkeeper couldn't place but didn't want in suspense, round-sum transfers "to sort out later". Each posting was individually defensible; collectively the balance means the P&L is understated or overstated by whatever genuinely belonged elsewhere — and the director may be sitting on a tax exposure they don't know exists.

3. Inter-company in disguise

Where the director runs more than one company, money moves between them — and lands in the DLA because it involved "the director's other business". It isn't a director's loan at all; it's an inter-company balance, and misfiling it as a DLA can manufacture a tax charge that proper classification would avoid — or hide one that proper classification would reveal. These need pulling out, agreeing between the companies, and showing as what they are.

Substantiating a DLA — the working method

1. Pull the full transaction listing for the account since it was last provably nil (which may be inception).
2. Classify every entry into the three buckets above — funding, personal/misposted, inter-company — plus a fourth: dividends or salary that were declared but posted here.
3. Get the director's answers in writing. For a balance of any size, verbal explanations are not evidence — and if the file is ever looked at, your notes are your defence.
4. Reclassify and restate: personal items to the DLA properly (or repaid), inter-company to inter-company accounts, misposted costs to the P&L where they belong.
5. Assess the tax position on what remains — the genuine loan — and paper it: loan agreement, interest terms if any, repayment plan.

In scoping terms: an unexplained five-figure DLA is unpriced risk, and the quote should say so explicitly — a fixed fee for the substantiation exercise, with the tax work priced once the balance is known. Quoting a blended number before the account is understood is how the cleanup ends up subsidised by you.

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