Taking money from your own company can seem straightforward. However, directors sometimes discover that withdrawals they believed were salary or dividends have instead been recorded as loans that must be repaid.
An overdrawn director’s loan account can result in substantial tax charges, unexpected repayment demands and, in serious cases, personal financial exposure if the company becomes insolvent.
Accountants regularly advise businesses and directors on these arrangements. Where inaccurate records or negligent advice lead to avoidable financial losses, a professional negligence claim may be possible.
However, an overdrawn balance does not automatically mean the accountant was negligent. The important questions are what advice should have been given, whether it would have changed the outcome and who suffered the financial loss.
Key Takeaways
- An overdrawn director’s loan account generally means the director owes money to the company.
- Overdrawn loans can create Corporation Tax, personal tax and National Insurance consequences.
- Accountant negligence may arise from inaccurate records, incorrect tax reporting or failure to advise about significant financial risks.
- The outstanding loan balance is not automatically a recoverable negligence loss; the claimant must establish additional loss caused by the accountant’s failure.
- A claim may belong to the company rather than the director personally, depending on who received the advice and suffered the loss.
The responsibility of accountants for negligent advice and/or conduct in relation to Directors Loan Accounts is not straightforward to assess and the causation of losses can be particularly challenging. There are statutory angles and it is important to seek early legal advice to define the nature and extent of any losses to be claimed by Companies and, in certain circumstances, by Directors personally. Tony Hill - Head of Professional Negligence & Commercial Litigation
What Is a Director’s Loan Account?
A director’s loan account records money moving between a director and their limited company.
If a director lends personal funds to the business, the company may owe them money.
However, if the director withdraws company funds that are not properly treated as salary, dividends, business expenses or repayment of an existing loan, they may owe the company.
The account is then described as overdrawn.
This matters because a limited company is legally separate from its directors and shareholders. Owning a business does not mean its money can automatically be treated as personal income.
Why Do Director’s Loan Accounts Cause Problems?
Problems often build up gradually.
A director might withdraw money throughout the year, expecting their accountant to allocate the payments to dividends when preparing the accounts.
However, dividends can only be paid from profits legally available for distribution, and the correct corporate procedures must be followed.
If there are insufficient profits, or the payments cannot properly be treated as dividends, the withdrawals may remain outstanding as loans.
A director who believed they had received income could therefore discover that they owe the company a substantial amount.
The situation becomes more serious where tax liabilities arise or the business enters financial difficulty.
What Tax Applies to an Overdrawn Director’s Loan Account?
The tax treatment depends on who received the loan, the amount involved and whether it has been repaid.
Section 455 Corporation Tax
Where a close company lends money to a participator, broadly a shareholder, or certain associates, a Corporation Tax charge may arise under section 455 of the Corporation Tax Act 2010.
A director who is not a participator will not ordinarily be caught solely because they are a director, although other tax rules may still apply.
If a relevant loan remains outstanding nine months after the company’s Corporation Tax accounting period ends, section 455 tax may become payable.
For loans made between 6 April 2022 and 5 April 2026, the applicable rate was 33.75%.
For relevant loans made on or after 6 April 2026, the rate increased to 35.75%.
HMRC has also confirmed that its Corporation Tax online service will not reflect the new rate until 6 April 2027. Companies affected by this issue may need to amend earlier returns after that date.
The company may later reclaim section 455 tax when the loan is repaid, released or written off, subject to the relevant rules and timing. However, interest charged on late-paid tax is not refunded.
Repaying and Re-borrowing
Repaying a loan shortly before the deadline does not necessarily prevent a tax charge if similar amounts are borrowed again.
Anti-avoidance rules can apply to repayments and new borrowing of £5,000 or more within a relevant 30-day period.
A separate rule may apply where at least £15,000 is outstanding and arrangements for further borrowing have been made.
Accountants advising on repayment arrangements should therefore consider these restrictions.
Benefits in Kind and Loan Write-offs
Where an employment-related loan exceeds the relevant £10,000 exemption threshold and carries no interest or interest below HMRC’s official rate, benefit-in-kind tax consequences may arise.
The company may also become liable for Class 1A National Insurance.
Writing off an overdrawn loan does not necessarily remove the tax problem. A loan released or written off by a close company may be taxed as dividend income for the borrower, with Class 1 National Insurance potentially arising where the relevant employment conditions are met.
These consequences make competent, timely accounting advice particularly important.
What Are the Company Law Requirements?
Directors’ loans are not automatically unlawful.
However, under section 197 of the Companies Act 2006, loans to directors generally require members’ approval unless an exception applies.
One exception covers certain transactions where the aggregate value does not exceed £10,000.
Dividends are subject to separate requirements. They must be supported by profits available for distribution, and shareholders who knowingly receive unlawful distributions may be required to repay them.
Directors must also consider their wider duties, particularly where the company is experiencing financial difficulties and creditors’ interests become relevant.
When Could an Accountant Be Negligent?
An accountant is not responsible simply because a director has withdrawn more money than they should have.
However, professional negligence may arise where the accountant was instructed to manage or advise on the loan account and failed to exercise reasonable skill and care.
Examples might include:
- Maintaining inaccurate loan account records.
- Incorrectly classifying personal and business transactions.
- Failing to identify a substantial outstanding balance.
- Submitting incorrect Corporation Tax returns.
- Advising that withdrawals can be treated as dividends without checking the company’s available profits.
- Failing to warn about significant section 455 tax liabilities.
- Giving incorrect advice about repayment deadlines or re-borrowing arrangements.
- Overlooking relevant benefit-in-kind or National Insurance consequences.
- Recommending a loan write-off without explaining the resulting tax liabilities.
Whether any of these amounts to negligence depends on the accountant’s instructions, the information available and what a reasonably competent professional should have done. For further information about professional responsibilities and financial losses, read our guide to accountant negligence claims.
Who Can Bring an Accountant Negligence Claim?
This is an important distinction.
The accountant may have been engaged by the company rather than the director personally.
For example, section 455 Corporation Tax is a liability of the company. If negligent advice causes the company financial loss, the claim may belong to the company.
Where the company enters liquidation, a claim belonging to it will generally be controlled by the liquidator.
A director may have a personal claim where the accountant owed them a separate duty, such as under a personal engagement or when providing individual tax advice, and that breach caused personal financial loss.
The engagement letter and the nature of the advice will therefore be central to identifying the correct claimant.
Does an Overdrawn Loan Automatically Mean Accountant Negligence?
No.
Suppose a director withdraws £100,000 for personal use. Their accountant subsequently confirms that the director’s loan account is overdrawn by £100,000.
The repayment obligation does not automatically amount to a £100,000 negligence loss.
The director received the money, and the funds belonged to the company.
A potential negligence claim would instead need to identify financial consequences that competent accounting advice would probably have prevented.
These might include avoidable tax, interest, penalties or other losses resulting from incorrect advice.
What Happens If the Company Becomes Insolvent?
An overdrawn director’s loan account can become particularly serious during liquidation.
The outstanding loan is generally an asset belonging to the company. A liquidator may seek repayment from the director for the benefit of creditors.
A director who previously viewed the balance as an accounting technicality could therefore face a significant personal repayment demand.
Dividends used to clear the loan may also be scrutinised, particularly where the company lacked distributable profits or was unable to meet its financial obligations.
Accountant negligence may be relevant if incorrect advice caused the director or company additional financial loss.
However, insolvency does not automatically cancel the loan or make the accountant responsible for repaying it.
What If the Loan Account Records Are Wrong?
Sometimes the underlying problem is inaccurate accounting rather than incorrect advice.
Payments recorded as personal drawings may actually represent legitimate business expenses, salary, properly declared dividends or repayment of money previously advanced to the company.
An accountant who incorrectly records these transactions could produce an overstated loan balance.
The correct approach is to reconstruct the transactions using bank statements, payroll records, dividend paperwork, expense information and earlier accounts.
This can help establish whether the balance is genuinely owed and whether professional errors contributed to the problem.
What Compensation Could Be Claimed?
Potential losses may include:
- Avoidable Corporation Tax charges.
- Interest or penalties resulting from incorrect advice.
- Unnecessary personal tax liabilities.
- Reasonable professional fees incurred to correct negligent accounting.
- Other financial losses that competent advice would probably have prevented.
However, compensation cannot automatically include tax or repayment obligations that would have arisen regardless of the accountant’s conduct.
Where section 455 tax can subsequently be reclaimed, the recoverable loss may require particular analysis.
Damages must reflect the additional financial disadvantage caused by the negligence and fall within the scope of the accountant’s duty.
The amount recoverable may also be affected where the claimant’s own conduct contributed to the loss. Where incorrect accounting or tax advice has resulted in avoidable liabilities, our guide to professional negligence claims for negligent tax advice explains the wider principles of liability and compensation.
How Do You Prove the Accountant Caused Your Loss?
Causation is often one of the most challenging issues.
A director might argue:
“If my accountant had warned me about the tax consequences, I would not have withdrawn another £60,000.”
That explanation may be relevant, but it must be supported by evidence.
Would the director genuinely have acted differently? Were previous warnings ignored? Could the company lawfully have paid a dividend instead? Was repayment before the relevant deadline realistic?
Emails, financial records and contemporaneous advice can help establish what would probably have happened.
The question is not simply whether the accountant made a mistake, but whether competent advice would have produced a better financial outcome.
What Evidence Is Needed?
Useful documents may include:
- The accountant’s engagement letter.
- Annual accounts and director’s loan ledgers.
- Corporation Tax returns and CT600A information.
- Bank statements and payroll records.
- Dividend vouchers and company resolutions.
- Emails and written accounting advice.
- HMRC assessments and correspondence.
- Repayment records or insolvency correspondence.
- Evidence of the financial loss.
An independent accountant or tax specialist may be required to assess both the professional standard and the resulting financial consequences.
Complaining Versus Claiming Compensation
An accountant’s professional body may investigate alleged breaches of professional standards, depending on the accountant’s membership.
However, a disciplinary complaint is different from a civil claim for financial compensation.
Where substantial losses have arisen, a professional negligence claim may need to be considered.
The Professional Negligence Pre-Action Protocol will normally apply before court proceedings, allowing the accountant and their insurers an opportunity to investigate and respond.Our guide to reporting an accountant for negligence explains the distinction between professional-body complaints and civil compensation claims.
How Long Do You Have to Claim?
Professional negligence claims are subject to limitation periods under the Limitation Act 1980.
Claims in contract generally have six years from the relevant breach. Claims in negligence typically have six years from when actionable damage occurs.
Where negligence-related damage was not discovered immediately, an alternative three-year period based on the relevant date of knowledge may sometimes apply, subject to a 15-year longstop.
The precise deadline depends on the legal basis and circumstances of the claim.
An HMRC enquiry or liquidator’s demand may reveal a problem years after the accountant’s alleged mistake, so early legal advice is important.
What Should You Do If Your Director’s Loan Account Is Unexpectedly Overdrawn?
Begin by obtaining the full loan account ledger and supporting financial records.
Check whether transactions were correctly classified and identify any tax assessments or repayment demands.
Next, establish what advice the accountant provided, who engaged them and whether different advice would probably have prevented the loss.
A professional negligence review can then consider whether the accountant breached their duties and whether a claim belongs to the director personally or the company.
If negligent accounting advice concerning a director’s loan account has caused significant financial loss, Wealth Recovery Solicitors can review the circumstances and explain the options available.
FAQs
Is an overdrawn director’s loan account illegal?
Not automatically. Director’s loans are permitted, although company-law approval requirements and tax obligations may apply.
Do I have to repay an overdrawn director’s loan?
Generally, an overdrawn balance represents money owed to the company. Whether the recorded amount is correct depends on the underlying transactions.
Can my accountant be responsible for section 455 tax?
Potentially, where negligent advice or reporting caused avoidable financial loss. However, section 455 tax is a company liability, so the correct claimant and the extent of recoverable loss must be established.
Can I simply write off the loan?
Writing off a loan can create personal tax and potentially National Insurance liabilities. It is not automatically a tax-free solution.
What happens if my company goes into liquidation?
The outstanding loan is generally an asset of the company, and a liquidator may seek repayment for creditors.
Can I claim because my accountant never warned me?
Possibly, where providing that advice fell within the accountant’s responsibilities and the failure caused financial loss. The existence of a duty and the identity of the person who suffered the loss must be established.