HMRC is asking about my director's loan account, what does that mean?

Director's loan accounts are one of the most frequently reviewed areas in a corporation tax enquiry because they sit at the boundary between company money and personal income. HMRC knows that a loan can, in substance, be used as a way of extracting funds without paying the tax that would apply to salary or dividends, so it checks the mechanics closely.

A question about your loan account typically means HMRC has spotted a balance that was outstanding at the year end and wants to understand what happened to it afterwards: was it repaid in cash, written off, converted into salary or dividend, or simply left running into the following year.

This is a routine line of enquiry rather than an accusation. Plenty of directors run a loan account that fluctuates through the year as a normal part of managing cash between themselves and the company, and HMRC's questions are usually about documentation and timing rather than legitimacy.

The first thing HMRC checks is whether the loan was repaid within nine months and one day of the end of the accounting period in which it arose, because that determines whether a section 455 charge applies under Corporation Tax Act 2010. If the loan wasn't cleared in time, HMRC will check the charge was correctly calculated and included on the company tax return.

HMRC also looks for repayments that appear artificial, sometimes described as 'bed and breakfasting', where a loan is repaid shortly before the deadline and a similar amount is redrawn shortly after. Section 464A specifically targets arrangements designed to sidestep the charge, and HMRC will ask detailed questions about the timing and source of any repayment that looks close to this pattern.

If the loan exceeded £10,000 at any point and was interest-free, or charged interest below HMRC's official rate, HMRC will also check whether a benefit-in-kind was reported on the P11D and whether Class 1A National Insurance was paid on it.

Start by producing a clear, dated statement of the loan account for the periods HMRC is asking about, showing every drawing, every repayment, and the running balance. This is the single most useful document you can provide, and its absence is often what prompts HMRC to widen its questions.

If repayments were made by dividend, make sure you can point to the board minute and dividend voucher, and that the company had sufficient distributable reserves at the time, since HMRC will test whether a repayment described as a dividend was actually lawful.

If the loan account is properly documented and the s455 position was correctly handled, there's usually no extra tax cost beyond the professional time spent responding to HMRC's questions.

If HMRC finds the charge was missed or a benefit-in-kind wasn't reported, expect the underpaid tax, interest from when it was due, and potentially a penalty under Schedule 24 Finance Act 2007 if HMRC considers the error careless or deliberate.

Growth plan clients have free tax investigation insurance covering our fees for enquiries into director's loan accounts. See /fees for details.

Don't rely on memory for loan movements; produce the ledger and reconcile it to the bank statements before you respond.

Don't describe an informal cash movement as a 'repayment' without evidence it actually happened and when.

Don't leave a benefit-in-kind unreported because the loan has since been cleared; the P11D obligation is based on the position during the tax year, not afterwards.