If you run a garage or MOT centre as a limited company, there’s a good chance you’ve heard your accountant mention a Director’s Loan Account.
And there’s an even better chance you nodded… without fully understanding what it meant.
Director’s Loan Accounts (often shortened to DLAs) are one of the most misunderstood — and most risky — areas for garage owners operating as limited companies.
Used properly, they’re fine.
Ignored or misunderstood, they can quietly turn into a tax nightmare.
This blog explains what a Director’s Loan Account actually is, why garages are particularly exposed, and how to stop it becoming a problem before HMRC gets interested.
What Is a Director’s Loan Account (In Plain English)?
A Director’s Loan Account records money:
- You take out of the company
- Or put into the company
- That is not salary
- And not dividends
- And not expenses
Think of it as a running tab between you and your business.
If you:
- Pay a personal bill from the company account
- Transfer money to yourself “temporarily”
- Take drawings without declaring dividends
…it goes through the Director’s Loan Account.
Why Garages & MOT Centres Are Especially at Risk
Garages are high-risk for DLA problems because of how money flows.
You typically have:
- High turnover
- Regular cash and card transactions
- VAT sitting in the bank
- Big, unpredictable costs
- Directors closely involved in day-to-day spending
It’s very easy for lines to blur between:
- Business money
- Personal money
- “I’ll sort that later” money
That’s where Director’s Loan Accounts quietly build up.
A Common Garage Owner Story
This will sound familiar.
A garage director:
- Pays for a personal item from the business account
- Transfers money out to cover a quiet personal month
- Assumes profits will cover it later
- Plans to “balance it at year end”
On paper, the business looks busy.
In reality, the Director’s Loan Account is growing quietly in the background.
No alarms go off.
No HMRC letters arrive.
Until the accounts are done.
When a Director’s Loan Account Is Perfectly Fine
Let’s be clear — DLAs are not automatically bad.
They are fine when:
- They’re small
- They’re temporary
- They’re monitored
- They’re cleared quickly
Examples:
- You lend money to the company short-term
- You take money out and repay it within the year
- Dividends are declared later to clear it
Used consciously, a DLA can be a useful tool.
The problem is unplanned and unmanaged DLAs.
When a Director’s Loan Account Becomes Dangerous
A DLA becomes a problem when:
1. It’s Overdrawn
This means:
- You owe the company money
- Not the other way around
An overdrawn DLA is a red flag for HMRC.
2. It’s Left Unpaid After 9 Months
If your loan account is still overdrawn:
- 9 months after the company year end
- Extra tax charges can apply
This catches many garage owners completely off guard.
3. It Grows Quietly Over Time
Many directors don’t realise:
- How big it’s become
- That it exists at all
- That it can’t just be ignored
We often see five-figure loan accounts built up without intent.
The Tax Consequences Garage Owners Don’t Expect
Here’s where it gets serious.
Section 455 Tax
If a director owes the company money beyond the deadline, the company may pay:
- A temporary tax charge
- Based on the loan balance
It’s not cheap, and it hurts cashflow.
Benefit in Kind Issues
If the loan is large:
- HMRC may treat it as a benefit
- Personal tax implications can arise
- Additional reporting is required
Again — often a surprise.
“But We’re Profitable” Isn’t a Defence
This is important.
Profit does not cancel out a Director’s Loan Account.
You can have:
- Healthy profits
- A strong bank balance
- And still an illegal or risky loan position
HMRC don’t look at intent.
They look at structure and records.
Why Director’s Loan Accounts Attract HMRC Attention
DLAs are a favourite HMRC enquiry area because:
- They’re easy to spot
- They often indicate poor control
- They blur personal and business finances
- They’re commonly misunderstood
For garages, this risk is amplified due to transaction volume.
How Director’s Loan Problems Start (Without Bad Intent)
Most DLA problems don’t come from wrongdoing.
They come from:
- No plan for director pay
- No regular bookkeeping
- No clear separation of money
- Relying on year-end fixes
Good people.
Busy businesses.
Poor visibility.
How to Clear a Director’s Loan Account Properly
There are only a few legitimate ways to clear an overdrawn DLA:
- Repay the money personally
- Declare dividends (if profits exist)
- Pay additional salary (with PAYE implications)
- Offset against expenses (if genuine)
There is no magic fix.
And not all options are tax-efficient.
Why “We’ll Declare Dividends Later” Can Be Risky
Declaring dividends after the fact only works if:
- Profits genuinely existed at the time
- Cashflow supported it
- Documentation is correct
Back-dating or guessing is risky and easily challenged.
The Link Between DLAs and Stress
DLAs cause:
- Unexpected tax bills
- Awkward conversations
- Cashflow pressure
- Personal anxiety
Most directors don’t even realise this is what’s causing the problem.
How Well-Run Garages Avoid DLA Problems
Strong garage businesses:
- Plan director pay properly
- Review numbers regularly
- Separate VAT immediately
- Don’t treat the business as a personal bank account
- Get advice before problems build
This isn’t about being restrictive — it’s about control.
What a Good Accountant Should Be Doing Here
A good accountant for a garage or MOT centre should:
- Monitor the DLA regularly
- Warn you early
- Explain consequences clearly
- Help you clear it safely
- Stop it happening again
If your DLA only comes up at year end, that’s already too late.
Final Thought: Director’s Loan Accounts Are a Symptom, Not the Problem
A DLA issue usually points to:
- Poor cash planning
- Unclear director pay
- Lack of visibility
Fix the structure, and the problem disappears.
Ignore it, and it grows teeth.
How Accounting Matters Helps Garage Directors
We help garage and MOT centre limited companies:
- Identify DLA risks early
- Clear loan accounts safely
- Structure director pay correctly
- Reduce HMRC exposure
- Regain control of their finances
If the phrase “Director’s Loan Account” makes you uneasy, that’s a sign it’s time to look properly.