HMRC Campaign and your DLA

HMRC is currently running a compliance campaign targeting director loan accounts (DLAs) to identify unpaid s455 tax on overdrawn accounts, with a particular focus on loans released or written off between April 2019 and April 2023. Directors are being asked to verify DLA balances, and failure to cooperate can lead HMRC to widen checks into both the company and directors’ personal affairs, using its enquiry powers and information requests set out in the Enquiry Manual. Enquiries often begin with detailed data-gathering, and HMRC will expect directors to be able to explain and evidence how money has moved between them and their company.

For directors of close companies, the key message is that withdrawals from the company must be properly legitimised and controlled. A DLA is not a vague “director’s pot” that can be dipped into at will. Every entry should have a clear basis in law and in company records: salary approved via payroll, dividends properly declared, expenses supported by receipts and mileage logs, or loans documented with terms and repayment expectations. Where there is a pattern of regular drawings that do not match declared salary or dividends, HMRC becomes particularly interested in whether those amounts are in fact undeclared earnings.

When HMRC opens an enquiry focusing on DLAs, it usually starts by asking for a breakdown of all entries to and from the director’s account over the period in question. That will typically mean a transaction‑by‑transaction analysis, often tied back to the nominal ledger and bank statements. HMRC will then ask for an explanation of how the loans arose: for example, whether the company paid personal bills, the director withdrew cash, or the company funded living costs. They will also request evidence of repayments and settlements, such as bank transfers from the director back to the company, journal entries, or board minutes documenting a write‑off.

At this stage, HMRC is not only checking arithmetic; it is testing the credibility of the story behind the numbers. If a director claims that withdrawals are “loan repayments” or “temporary advances”, HMRC will want to see consistency: is there a loan agreement, are repayments realistic and regular, and do subsequent periods show the balance coming down? If withdrawals are described as dividends, HMRC looks for contemporaneous dividend vouchers, board minutes, sufficient distributable reserves and correct entries on the CT600 and in the director’s personal tax return. If payments are said to be expenses, HMRC expects proper claims, VAT receipts where relevant, and a clear business purpose.

Where these explanations are weak or missing, HMRC may re‑characterise withdrawals in ways that increase the tax at stake. One route is to argue that the sums are earnings from employment, subject to PAYE and National Insurance, potentially creating arrears, penalties and interest for the company. Another is to treat the drawings as loans to a participator of a close company, bringing the s455 charge into play. Section 455 Corporation Tax is a temporary tax on loans to participators (such as directors‑shareholders) that remain outstanding more than nine months after the end of the accounting period. If a DLA is overdrawn at that point, the company can face a significant s455 bill.

Although s455 is in principle repayable when the loan is cleared, HMRC is scrutinising whether loans are genuinely repaid or simply “bed and breakfasted” – briefly cleared around the year end and then redrawn. HMRC takes a dim view of circular arrangements designed only to avoid the s455 charge and may look at anti‑avoidance provisions that treat certain repayments as ineffective. This is one reason why the current campaign is drilling into loans that were released or written off between April 2019 and April 2023: a write‑off can itself trigger income tax and National Insurance implications for the director, and HMRC wants to be sure that both company and director have reported the consequences correctly.

From April 2026, a new online HMRC tool has been introduced to allow companies to confirm that loans to participators have been fully repaid. This tool is intended to tie together information already reported on the CT600A (the supplementary pages for loans to participators) with later repayments, helping HMRC to reconcile s455 charges and repayments more efficiently. For compliant companies, using the tool should give an opportunity to demonstrate that loans have been cleared and that any s455 repayments claimed are justified. For less organised companies, however, the tool may expose mismatches between what was filed originally and what has actually happened in the DLA since.

Access the tool here https://www.gov.uk/guidance/tell-hmrc-about-loans-that-participators-have-repaid-in-full

Conclusion

In practice, the current HMRC campaign is pushing directors of close companies to tighten up governance around DLAs. That means:

• Keeping a detailed, up‑to‑date DLA ledger, reconciled regularly to the main accounts and bank.
• Ensuring every withdrawal has an agreed treatment at the time it is made, not months later.
• Recording board decisions on salary, bonuses, and dividends in minutes and supporting them with proper paperwork.
• Making formal loan agreements where material sums are left owing to the company, setting commercial interest (where appropriate) and realistic repayment timetables.
• Monitoring the DLA balance throughout the year, especially as the nine‑month post year‑end point approaches, to manage any potential s455 exposure.

If a director loan account has been overdrawn for a significant portion of the year, or if there have been write‑offs or complex patterns of drawings between April 2019 and April 2023, it is strongly advisable to seek professional advice. A tax adviser or accountant can review the DLA history, assess possible s455 liabilities, consider whether past filings need correcting, and help prepare clear explanations and evidence should HMRC raise questions. Getting ahead of the issue is crucial: once HMRC has opened a formal enquiry, options become narrower and penalties can quickly escalate if inaccuracies are found.

Ultimately, HMRC’s campaign is a reminder that in a close company, the line between “company money” and “director’s money” is not blurred in law, even if it sometimes feels that way in practice. The company is a separate legal entity, and any funds a director takes out must pass through a legitimate route – employment income, dividends, reimbursed expenses, or properly structured loans. Directors who treat the company bank account as an informal overdraft risk not only unexpected s455 tax but also reclassifications that create PAYE, NIC, and benefit‑in‑kind exposures, along with interest and penalties. Reviewing your DLA now, and putting robust controls around future withdrawals, is the best defence against unwelcome attention in this HMRC campaign.

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