HMRC enquiries into a director's loan account

When HMRC checks a director’s loan account it rebuilds the account from the company’s records, decides whether each withdrawal was really a loan or was salary, a dividend or a benefit, and checks that section 455 tax, benefit in kind reporting and any write off were dealt with correctly. Adjustments are usually settled by correcting the company tax return and supplementary pages, paying the extra tax with interest through the company, the payroll or the director’s own return, and agreeing any penalty.

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Why does HMRC look closely at directors’ loan accounts?

A director’s loan account records money taken from or paid into the company that is not salary, a dividend or an expense repayment. GOV.UK says the company must keep that record and show any balance on the balance sheet. The account sits where several taxes meet: corporation tax on the company, section 455 tax on loans to participators in a close company, income tax and National Insurance on earnings and benefits, and income tax on dividends. An error in one area usually affects another, which is why a loan account question often widens into a linked enquiry into the company and the director. The basics are in directors’ loan accounts explained.

What does HMRC check first?

Expect requests for the nominal ledger for the loan account, bank statements, credit card statements, board minutes, dividend paperwork and payroll records. The officer will usually:

trace each debit to see whether personal spending, such as household bills or private purchases on a company card, was posted as a business expense instead of to the loan account
check each credit was real: that a bonus was actually voted and put through payroll, and that a dividend was properly declared
compare balances at the year end and nine months later with the CT600A supplementary pages
look for repayments made just before a deadline and new withdrawals soon after

Credits need to stand up. Under section 830 of the Companies Act 2006 a company may only make a distribution out of profits available for the purpose, so a dividend credited to clear an overdrawn balance without enough distributable profits is open to challenge; see dividends credited to a director’s loan account. A bonus credited to the account has its own timing rule: section 18 of ITEPA 2003 treats a director’s earnings as received at the earliest of the usual times or when sums are credited in the company’s accounts or records, so PAYE is due from that point.

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Are the withdrawals loans or earnings?

This is a question of fact. HMRC’s National Insurance Manual at NIM12017 says each withdrawal can be a repayment of a credit balance, a further loan, or a payment on account of earnings, and an overdrawn account is not conclusive either way. NIM12018 adds that if the directors own all the shares and decide, formally or informally, that withdrawals are earnings or on account of earnings, they are not loans, and PAYE and National Insurance apply when the money is withdrawn. A regular pattern of withdrawals on an overdrawn account points towards earnings, and the inference is stronger if the pattern runs across several years. The same reasoning applies to personal expenses paid on a company credit card.

If HMRC succeeds, the company faces PAYE and Class 1 National Insurance on the withdrawals, with interest from the dates they should have been paid, rather than section 455 tax.

How does HMRC test the section 455 charge?

Section 455 of CTA 2010 applies where a close company lends to a participator or associate. The rate matches the dividend upper rate for the tax year the loan is made, and GOV.UK gives it as 33.75%, or 32.5% for loans made before 6 April 2022. The tax is due on the day after nine months from the end of the accounting period in which the loan was made, and GOV.UK says interest is added until the tax is paid or the loan repaid.

The main questions are whether the year end balance was right and whether repayments counted. HMRC’s Company Taxation Manual at CTM61602 says a book entry that replaces the director as debtor with another group or associated company is not a repayment, relying on Collins v Addies, and that circular movements of balances between companies should be challenged. Since Finance Act 2025, the matching rules are in section 464ZA: repayments of £5,000 or more matched within 30 days by new chargeable payments of £5,000 or more in a later accounting period are treated as repaying the new loans, and a similar rule applies where £15,000 or more is owed and replacement loans were arranged when the repayment was made. See bed and breakfasting director loans for how these work.

Does the loan create a benefit in kind?

Under section 180 of ITEPA 2003 the beneficial loan charge does not apply if the total outstanding on the director’s employment related loans does not exceed £10,000 at any time in the tax year. GOV.UK says that above that level the company must treat the loan as a benefit in kind and account for National Insurance, and the director reports it and may pay tax on the difference between the interest paid and HMRC’s official rate. HMRC will check the highest balance during the year, not just the year end figure, and whether forms P11D were filed.

What if the loan has been written off?

A release or write off of a loan that was within section 455 is charged to income tax on the director under section 415 of ITTOIA 2005. CTM61660 says that where the director is an employee the amount written off also attracts Class 1 National Insurance, citing Stewart Fraser Ltd v HMRC. The company can claim relief from the section 455 tax. HMRC will check that a write off was properly documented and that both the National Insurance and the income tax were dealt with; see director loan written off.

How are adjustments settled?

The settlement depends on what HMRC finds:

Larger loan balance: the company’s self assessment and CT600A are corrected and the extra section 455 tax paid with interest.
Withdrawals treated as earnings: PAYE and Class 1 National Insurance are paid through the company, and the director’s return is corrected.
Personal costs claimed as business expenses: disallowed for corporation tax and treated as loans, earnings or benefits.
Benefits: corrected P11D reporting and National Insurance from the company, and income tax through the director’s return.

Relief for repayments comes under section 458. It must be claimed within four years from the end of the financial year in which the repayment, release or write off happens, and where the repayment is made after the section 455 tax fell due, relief is not given until nine months after the end of the accounting period of repayment. CTM61610 notes that HMRC provides form L2P for separate claims. Penalties for inaccuracies are reduced for disclosure under paragraph 10 of Schedule 24 to Finance Act 2007, to a minimum of 15% of the extra tax for a careless error disclosed after HMRC’s prompt. Where several taxes and years are involved, HMRC may agree everything in a contract settlement.

How might this look in practice?

Illustration only. A company’s year ends on 31 March 2026. Its CT600A showed £40,000 owed by the director at the year end, of which £30,000 was cleared by a dividend within nine months, leaving £10,000 and section 455 tax of £3,375 at 33.75%. HMRC finds £8,000 of private spending on the company card had been treated as business costs. If HMRC treats it as a loan, the outstanding balance becomes £18,000 and the section 455 tax £6,075, the £8,000 is disallowed for corporation tax, and because the balance exceeded £10,000 during the year a benefit in kind also arises. If instead HMRC shows a pattern of earnings, PAYE and National Insurance apply to the £8,000.

What mistakes do companies make?

Clearing an overdrawn balance with a dividend the company could not lawfully pay.
Crediting a bonus to the account without running it through payroll at that time.
Reporting only the year end balance when the balance exceeded £10,000 earlier in the year.
Repaying just before the nine month deadline and redrawing straight after.
Moving the debt to a sister company and treating that as repayment.
Writing off a loan and dealing with income tax but not National Insurance.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.

HMRC enquiries into a director’s loan account