If you run a garage or MOT centre through a limited company, you’ve almost certainly heard the phrase “Director’s Loan Account”.
And if we’re honest — many directors nod when it’s mentioned, without fully understanding what it actually means.
At Hammond & Co, we regularly see Director’s Loan Accounts (DLAs) misunderstood in the motor trade. They’re not inherently bad. In fact, when handled correctly, they’re perfectly legitimate.
But when they’re unmanaged, they quietly become one of the biggest hidden risks in a garage business.
This guide explains:
- What a Director’s Loan Account really is
- Why garages and MOT centres are particularly exposed
- When it’s fine
- When it becomes dangerous
- And how to stay in control before HM Revenue and Customs (HMRC) take an interest
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
- Not dividends
- And not reimbursed expenses
Think of it as a running tab between you and your business.
If you:
- Pay for something personal from the company account
- Transfer money to yourself “temporarily”
- Take drawings without declaring dividends
…it goes through the Director’s Loan Account.
It’s simply a record of who owes who.
Why Garages & MOT Centres Are Especially at Risk
Garage businesses have fast-moving, high-volume cashflow.
Typically, you’re dealing with:
- Regular card and cash transactions
- VAT sitting in the bank that isn’t yours
- Parts purchases
- Unexpected equipment costs
- Directors heavily involved in day-to-day spending
In that environment, it becomes very easy for lines to blur between:
- Business money
- Personal money
- “I’ll sort that later” money
And that’s exactly how DLAs quietly build up.
No alarms.
No obvious warning signs.
Until the accounts are prepared.
A Story We See All the Time
A garage director:
- Pays for a personal purchase from the business account
- Transfers money during a quieter personal month
- Assumes profits will cover it
- Plans to “tidy it up at year end”
On paper, the business looks busy.
In reality, the Director’s Loan Account is growing in the background.
Nothing feels wrong.
Until the year-end review reveals a five-figure overdrawn balance.
When a Director’s Loan Account Is Perfectly Fine
Let’s be clear — DLAs are not automatically a problem.
They’re fine when they are:
- Small
- Temporary
- Monitored
- Cleared quickly
Examples:
- You lend the company money short-term
- You take funds out and repay them within the year
- Dividends are declared properly to clear the balance
Used consciously, a DLA is simply part of how a limited company operates.
The danger is when it’s unplanned and unmanaged.
When a Director’s Loan Account Becomes Dangerous
1️⃣ It’s Overdrawn
This means:
You owe the company money.
An overdrawn DLA is a red flag for HMRC because it suggests the company is effectively lending money to the director.
2️⃣ It’s Still Overdrawn 9 Months After Year End
If the balance hasn’t been cleared within nine months of the company’s year end, additional tax charges can apply to the company.
This catches many garage owners completely off guard.
3️⃣ It Grows Quietly Over Time
Many directors:
- Don’t realise how large it has become
- Don’t understand the tax consequences
- Assume profit cancels it out
It doesn’t.
We frequently see loan accounts building up unintentionally into five-figure sums.
The Tax Consequences Garage Owners Don’t Expect
Section 455 Tax
If the loan isn’t cleared on time, the company may face a temporary tax charge based on the outstanding balance.
It’s reclaimable later — but it ties up cashflow and can be painful.
Benefit in Kind Issues
If the loan is substantial, HMRC may treat it as a benefit provided to the director.
That can create:
- Personal tax liabilities
- Additional reporting requirements
- Unexpected compliance issues
Most directors are completely unaware of this risk.
“But We’re Profitable” Isn’t a Defence
This is a key point.
You can have:
- Strong profits
- A healthy bank balance
- Busy workshop activity
And still have a problematic Director’s Loan Account.
Profit does not automatically clear a loan.
HMRC look at structure and documentation — not good intentions.
Why DLAs Attract HMRC Attention
Director’s Loan Accounts are a common enquiry focus because they:
- Are easy to identify in accounts
- Often reveal poor financial control
- Blur personal and business finances
- Are frequently misunderstood
In high-transaction industries like garages and MOT centres, that risk increases.
How DLA Problems Start (Without Bad Intent)
Most issues don’t come from deliberate wrongdoing.
They come from:
- No clear director pay structure
- Irregular bookkeeping
- No separation of VAT
- Relying on year-end adjustments
- Lack of regular financial visibility
Busy directors.
Growing businesses.
Limited oversight.
How to Clear an Overdrawn DLA Properly
There are only a few legitimate ways to resolve it:
- Repay the company personally
- Declare dividends (if sufficient profits exist)
- Pay additional salary (with PAYE consequences)
- Offset against genuine expenses
There is no magic fix.
And not every option is tax-efficient.
Why “We’ll Just Declare Dividends Later” Is Risky
Dividends only work if:
- Profits genuinely existed at the time
- Cashflow supported them
- Proper documentation was prepared
Backdating or guessing is risky and easily challenged.
The Hidden Cost: Stress
Unmanaged DLAs create:
- Unexpected tax bills
- Cashflow pressure
- Difficult conversations
- Personal financial stress
Often, the Director’s Loan Account is the underlying issue directors didn’t realise they had.
How Well-Run Garages Avoid DLA Problems
The strongest garage businesses:
- Plan director remuneration properly
- Review financials regularly
- Separate VAT immediately
- Don’t treat the business as a personal bank account
- Take advice before problems build
This isn’t about restriction.
It’s about control.
What a Good Accountant Should Be Doing
At Hammond & Co, we believe your accountant should:
- Monitor your Director’s Loan Account throughout the year
- Flag issues early
- Explain consequences clearly
- Help you clear balances safely
- Put structure in place to prevent recurrence
If your DLA only gets discussed when the year-end accounts are finalised, that’s already too late.
Final Thought: DLAs Are a Symptom, Not the Core Problem
A Director’s Loan Account issue usually signals:
- Poor cash planning
- Unclear director pay
- Lack of financial visibility
Fix the structure — and the issue disappears.
Ignore it — and it develops teeth.
How Hammond & Co Supports Garage & MOT Directors
We work with garage and MOT centre limited companies to:
- Identify Director’s Loan risks early
- Clear loan accounts safely
- Structure director pay efficiently
- Reduce HMRC exposure
- Restore financial clarity and control
If the phrase “Director’s Loan Account” makes you slightly uncomfortable, that’s usually a sign it needs proper attention.
And it’s far easier to deal with early — than after HMRC start asking questions.