As a construction business owner, managing your finances effectively is crucial. While tax-saving strategies can be beneficial, they should never come at the cost of your business’s stability. One area where many business owners unknowingly take significant risks is the Director’s Loan Account (DLA).
What is a Director’s Loan Account?
A Director’s Loan Account is created when you withdraw money from your company for personal use. Typically, this balance is cleared by declaring dividends at the year-end or within nine months after the year-end to avoid tax implications. Many business owners rely on this approach, assuming that as long as they repay the loan within the required timeframe, there are no major consequences.
However, this strategy only works when the business is profitable. When circumstances change, a DLA can become a serious liability.
The Hidden Risk of Director’s Loan Accounts
Recently, we encountered a construction business facing liquidation. The two directors had accumulated loan account balances totaling £300,000. When profits were steady, they regularly cleared their DLAs with dividends. But when the business started making losses, they could no longer declare dividends to cover these loans.
Now, not only have they lost their business and income, but they are also personally liable for repaying the outstanding loans. With the company in liquidation, the liquidators may seek repayment from the directors personally, putting them at risk of bankruptcy.
How to Avoid This Situation
To protect yourself and your business, consider these proactive steps:
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Regular Financial Reporting – Having monthly or quarterly financial reviews allows you to track your DLA and identify potential issues before they escalate.
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Alternative Remuneration Strategies – Instead of withdrawing funds through a DLA, consider structured salary and dividend payments that are sustainable and tax-efficient.
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Tax Planning with an Accountant – A proactive accountant can help you optimise tax strategies while ensuring long-term financial security.
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Early Intervention – If your business is struggling, seeking professional advice early can help you explore options before liquidation becomes the only choice.
Don’t Let Tax Savings Blind You to Business Risks
While minimising tax liabilities is important, it should never come at the cost of your financial security. If you’re relying on a Director’s Loan Account, now is the time to review your approach. Work with an accountant who understands the construction industry and can provide proactive advice to keep your business on track.
If you want to discuss your business finances or need help restructuring your remuneration strategy, get in touch with us today. Let’s ensure your financial health isn’t compromised by avoidable risks.
Book a call here to learn how we can give you the proactive advice and support your business needs.
Or visit our website to learn more about how we help construction business owners.
