Enquiries and checks by HM Revenue and Customs (HMRC) into the tax position of family and owner-managed companies often involve a review of loan accounts of the director shareholders (often referred to as ‘directors’ loan accounts’ (DLAs)).
This is particularly the case if DLAs are (or have been) overdrawn during the period under review.
What are they looking for?
HMRC recognises that DLAs are a potential source of additional tax under the ‘loans to participators’ rules (CTA 2010, s 455 and following), and possibly also a benefit-in-kind on the director (ITEPA 2003, s 175).
HMRC will commonly ask for a detailed analysis of the DLA, showing dates of debits and credits. Aside from the additional tax liabilities mentioned above, a DLA analysis may reveal (for example) failure to notify liability to a section 455 charge, ‘bed and breakfasting’ transactions, or failure by the company to apply PAYE at the correct time to bonuses credited to the DLA.
Additional work – from HMRC!
Not all companies produce DLAs in the level of detail requested by HMRC. Can HMRC compel the company to prepare a detailed DLA, even if the company would incur additional professional costs?
In Matharu Delivery Service Ltd v Revenue and Customs  UKFTT 553 (TC), HMRC opened an enquiry into the taxpayer company’s corporation tax self-assessment return for the period ended 28 February 2016. HMRC requested “a copy of the DLA, showing dates, amounts and descriptions of each transaction, for each director”. This was followed by an information notice (under FA 2008, Sch 36, para 1), repeating its request for the detailed DLA. A week later, a copy of the DLA maintained by the company was provided to HMRC.
HMRC subsequently pointed out that the DLA was not the fully itemised, chronological version requested. The company’s agent advised HMRC that the version provided was the only one held by the company. HMRC issued a second information notice to the company requesting a detailed DLA. HMRC later issued penalties for failing to comply with the information notices. The company appealed.
The company’s accountant had prepared only a summary DLA, because the company did not pay him to do more. The company argued it was possible for HMRC to reconcile the directors’ loan account provided to HMRC with the taxpayer’s bank statements and other working papers provided. However, the tribunal accepted HMRC’s evidence that it could not reconcile the information held and effectively create their own detailed DLA. Furthermore, the tribunal did not accept the company’s defence that providing the detailed DLA would have required the company to incur costs. The company’s appeal was dismissed.
HMRC might rewrite a DLA following a tax enquiry or investigation (e.g. where the director of a closely-controlled company has misappropriated funds; see HMRC’s Enquiry Manual at EM8620); but probably not otherwise. The tribunal in Matharu Delivery Service Ltd considered that where HMRC are enquiring into the tax affairs of a sole shareholder and their company (e.g. salary and dividends) information about the nature, size and timing of payments between the company and the individual were ‘reasonably required’ by HMRC.
The above article was first published in Business Tax Insider (January 2020) (www.taxinsider.co.uk).