Posted: 12 / 06 / 2022
I spend a lot of my time talking to people outside the accountancy profession. I find that if I use the phrase “Director’s Current Account” I often see a look of incomprehension in response. So I thought an article outlining what accountants are talking about when they refer to a Director’s Current Account would be useful.
Before we start
Let’s set out some basics about a typical small company.
A company is, in law, a separate ‘person’ with a legal existence that is distinct from its directors and shareholders. A company will typically have its own bank account, and makes contracts with its customers and suppliers. A limited liability company protects its shareholders from claims from the company’s suppliers – that’s what we mean by ‘limited liability’.
A typical small company in England and Wales will have one or more directors and one or more shareholders. The directors usually are also shareholders – but there may be shareholders who are not directors and directors who are not shareholders.
The director, or directors, are typically paid a salary (monthly or weekly) to which PAYE is applied – just like it is for other employees of the company.
But in a small company there is often some overlap between the financial affairs of the directors and those of the company. For example, a director might pay for his family holiday using a debit or credit card in the name of the company – and there is nothing illegal or wrong about that in most cases, but it does have some implications because the company’s money is not the director’s money.
A Director’s Current Account
A Director’s Current Account (sometimes referred to as a Director’s Loan Account) is simply a record of transactions between the director and the company. It is not an ‘account’ like a bank account – there are no account statements sent to the company. It is simply the company’s own record of its transactions with a director. Where the company has more than one director there may be separate Director’s Current Accounts for each director (assuming that there are some transactions with those directors).
So, for example, if a director does pay for his family holiday using a debit or credit card in the name of the company then a record of that expenditure needs to be in that director’s current account – to show that the director has had that money.
Where a director puts money into the company
Often – particularly at the start of a new business – the director will put money into the company. For example on start up the company may need money to buy materials.
Where a director initially puts money in to the company that will be recorded in his Director’s Current Account. This will produce a credit balance in the Director’s Current Account. This means that the company owes money to the director. The director has become a creditor of the company (which is just another way of saying the same thing).
Where a director takes money out of the company
A director can also take money out of the company. For example he could transfer money out of the company’s bank account to his own personal bank account. Another example of a director taking money out of a company is the payment by the company of a director’s personal bill, like the payment for the family holiday referred to earlier.
If the director has taken out less than he previously put in to the company, then he will still have a credit balance on his Director’s Current Account. There are no tax implications to this – the director is simply getting back some of his own money, the money that the company owes him.
If the director has taken out more than he previously put in to the company, then he will have a debit balance on his Director’s Current Account. The director has become one of the company’s debtors, he owes money to the company. There are tax implications to this. The logic behind this is that if there were no tax implications then directors could simply get their companies to pay all their personal bills and live tax free. Unsurprisingly the tax authorities would not be thrilled about that!
The nature of the tax implications and how those are dealt with are too complex to deal with in this brief article. If this may apply to you then you need to discuss it with your accountant.
Dividends and bonuses
Directors may be entitled to dividends (if they hold shares in the company) or bonuses. If the company authorises these, but the corresponding monies are not actually paid to the director, then this amounts to the director putting that unpaid money into the company. Again there may be tax implications of dividends and bonuses and professional advice should be obtained.
Your accountant should have all the relevant facts and information to enable him, or her, to advise you appropriately.
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(Note: This article applies to limited companies incorporated in England and Wales and trading within the United Kingdom. There are a number of additional issues which could be relevant in particular cases which it is not possible to deal with in a relatively short article such as this. Appropriate professional advice should be sought in each individual case.)