A personal purchase paid from the company bank account is posted as a debit to the director’s loan account and a credit to bank, at the full amount including any VAT. It is not a company expense and no VAT is reclaimed. The debit reduces any credit balance the director has, and if the account goes overdrawn the company and the director may face tax charges unless the balance is cleared.
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Why can’t a personal purchase go to an expense account?
Because the company did not buy anything for itself. A company is a separate legal entity, and GOV.UK says there must be a clear division between the company’s finances and those of its owners and directors. When the company pays for a director’s groceries or holiday, it has handed over company money for the director’s benefit. That creates either a debt owed by the director or a form of pay, never a business cost.
The tax rules point the same way. Section 54 of the Corporation Tax Act 2009 denies a deduction for expenses not incurred wholly and exclusively for the trade. VAT Notice 700 paragraph 4.6.1 says VAT charged on goods and services you do not get for your business is not input tax and cannot be reclaimed. HMRC’s Enquiry Manual at EM8505 tells officers to check directors’ private expenditure whenever they open a full enquiry into a close company, and to ask what has been charged to the loan account. Personal items buried in expense codes are one of the first things an enquiry looks for.
What is the double entry?
At the time of the payment:
- Debit the director’s loan account with the gross amount paid, including VAT.
- Credit the bank account.
There is no VAT line and no expense line. In most bookkeeping software this means coding the bank transaction straight to the loan account (often a balance sheet code named “director’s current account”) with the VAT rate set to “no VAT” or “outside the scope”.
If the payment was coded to an expense in error, a correcting journal entry is needed: debit the director’s loan account with the gross amount, credit the expense with the net amount, and credit VAT input with any VAT that was claimed. If that VAT has already been included on a submitted return, the error has to be corrected; our page on correcting VAT errors explains when that can be done on the next return.
Where a single payment mixes business and personal items, such as a supermarket receipt with office supplies and a family shop, split it. The business part goes to the right expense code with its VAT, and the personal part goes to the loan account.
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What does it do to the director’s loan account?
GOV.UK describes the director’s loan account as the record of any money a director borrows from or pays into the company. A personal payment by the company counts as money the director has taken. If the director’s account was in credit, perhaps from money lent to the company or unpaid expenses (see recording expenses a director paid personally), the debit simply reduces what the company owes. If there was no credit, or the debit exceeds it, the account becomes overdrawn and the director owes the company.
The law treats this as a loan even though nobody signed a loan agreement. Section 455(4)(a) of the Corporation Tax Act 2010 says a close company is treated as making a loan to a person where that person incurs a debt to the company.
When does an overdrawn balance cause tax?
Several rules can apply where the director is also a shareholder of a close company.
- Section 455 charge on the company. If the loan is still outstanding 9 months after the end of the accounting period, GOV.UK says the company shows it on form CT600A and pays corporation tax on the amount outstanding, at a rate which section 455(2) links to the dividend upper rate for the tax year the loan was made. The tax is reclaimable once the loan is repaid, released or written off, but interest on it is not. See how s455 tax works.
- Repay and redraw rules. GOV.UK says the charge can still apply to a loan of more than £5,000 if another loan of £5,000 or more is taken up to 30 days before or after the repayment, and to a loan of more than £15,000 if another loan was arranged when it was repaid. Our page on bed and breakfasting director loans covers these.
- Benefit in kind on the director. GOV.UK says that if a shareholder director owes the company more than £10,000 at any time in the year, the company must treat the loan as a benefit in kind and deduct Class 1 National Insurance, and the director may pay tax on interest at the official rate.
Small personal debits matter less than their total. A string of card payments for personal items can take a balance past these thresholds without anyone noticing, which is why the loan account needs reviewing monthly, not only at the year end.
Can the spending be treated as pay instead?
Yes, if that is what was agreed. EM8505 accepts that a company can pay private expenses as part of a director’s remuneration package, provided the payments are properly treated in the books and the disclosure requirements for directors’ remuneration are met. Where they are not part of the package, the same paragraph says they must be debited to the loan account.
If the company does treat a personal bill as pay, the reporting follows the GOV.UK rules on personal bills: where the director arranged the supply and the company paid the supplier, the cost goes on the P11D and is added to earnings for Class 1 National Insurance through payroll, but not PAYE tax. The decision has to be made at the time, not after HMRC finds the payment. Our page on when a company pays a director’s bills sets out the tax consequences of each route.
How is the overdrawn balance cleared?
| Method | Entry | Point to watch |
|---|---|---|
| Director repays in cash | Debit bank, credit loan account | Repayments followed by fresh drawings can fall within the 30 day rules |
| Dividend credited to the account | Debit dividends (equity), credit loan account | The company needs enough distributable profits; see dividends credited to a director’s loan account |
| Bonus or salary | Net pay credited to the loan account after PAYE and National Insurance | Taxed through payroll in the normal way |
| Write off | Debit an expense or equity account, credit loan account | GOV.UK says Class 1 National Insurance is deducted through payroll and the director pays income tax through Self Assessment |
What does company law require?
Section 197 of the Companies Act 2006 requires shareholder approval before a company makes a loan to a director. Section 207 removes that requirement where the loan and other relevant transactions total no more than £10,000. A director who routinely spends company money on personal items can pass that figure; see loans to directors and member approval.
Section 413 requires the notes to the accounts to give details of advances and credits granted to directors: the amount, an indication of the interest rate, the main conditions, and any amounts repaid, written off or waived. An accurate loan account is what makes that note possible.
What does a worked example look like?
Illustration only. A director’s loan account starts the month £1,500 in credit. During the month the company card pays for £900 of personal flights and a £1,200 sofa for the director’s home.
- Flights: debit loan account £900, credit bank £900.
- Sofa: debit loan account £1,200, credit bank £1,200. Any VAT on the sofa is not reclaimed.
The account moves from £1,500 in credit to £600 overdrawn. If the company’s year end is the last day of that month and nothing is repaid within 9 months, the £600 is reported on CT600A and section 455 tax becomes payable.
What mistakes come up most often?
- Posting personal items to “sundry expenses” with the intention of sorting it out at the year end.
- Reclaiming VAT on a personal purchase because the supplier’s invoice is in the company’s name.
- Posting the net amount to the loan account and leaving the VAT in the VAT account.
- Netting the personal spending against an expense claim without recording either properly.
- Clearing the balance by a dividend the company cannot lawfully pay.
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Related Accountapedia entries
- Recording section 455 tax in the accounts
- Business credit card reconciliation
- The VAT control account
- Recording dividends in the accounts
- Overdrawn director’s loan account in liquidation
Sources
- GOV.UK: Company and accounting records
- legislation.gov.uk: Act 2009 c. 4, section 54
- GOV.UK: Vat guide notice 700
- GOV.UK: Manual page EM8505
- GOV.UK: Directors loans
- legislation.gov.uk: Act 2010 c. 4, section 455
- GOV.UK: You owe your company money
- GOV.UK: What to report and pay
- legislation.gov.uk: Act 2006 c. 46, section 207
- legislation.gov.uk: Act 2006 c. 46, section 197
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.