A director’s overdrawn current account: an often-overlooked area of tax risk

In many SMEs, the current account between the director and their company serves as a tool for financial flexibility. In particular, it allows for the temporary financing of certain personal expenses or the adjustment of short-term cash flow.

However, when the current account becomes overdrawn – that is, when the director owes money to their company – the situation warrants particular attention. Often treated as routine in practice, it can have significant tax implications.

A common arrangement… but subject to rules

An overdrawn current account arises when a director withdraws more funds from their company than they are entitled to in the form of remuneration, dividends or reimbursements.

In practice, this situation may result from:

• cash advances;
• private expenses paid by the company;
• one-off withdrawals pending a dividend or a settlement.

In the short term, this flexibility may seem convenient. But the more the overdraft balance increases or persists, the greater the tax risks become.

A potentially costly benefit in kind

When a company allows a director to use company funds free of charge—or at an insufficient rate—the tax authorities generally consider this to constitute a benefit in kind (BIK).

In practice, notional interest is calculated on the debit balance of the current account.

This mechanism may lead to:

• additional taxation for the director;
• an increase in the overall tax burden;
• a review of the accounting treatment if the situation persists.

With the rise in reference rates observed in recent years, this impact is becoming more significant than before.

Risk of reclassification

In certain situations, a current account with a significant or long-standing overdraft may also attract the attention of the tax authorities.

Where the account appears to be structurally in deficit, the tax authorities may question the true nature of the cash flows and consider a partial reclassification as:

• hidden remuneration;
• implicit dividend;
• an abnormal or gratuitous benefit.

The risk is particularly high when:

• no credible repayment is envisaged;
• there is no agreement governing the situation;
• private withdrawals are recurrent.

A few precautions to bear in mind

An overdraft is not prohibited, but it must be actively managed.

There are a few best practices that generally help to limit the risks:

• ensure it does not become a regular occurrence or grow too large;
• set out the terms of any repayment arrangements in writing;
• record the applicable interest correctly;
• periodically weigh up the options between interest income, dividends and repayment.

In some cases, prompt settlement may be preferable to a gradual accumulation of overdraft amounts.

A comprehensive analysis remains essential

The management of a current account cannot be viewed in isolation from the executive’s overall remuneration strategy.

The balance between:

• remuneration;
• dividends;
• benefits in kind;
• advances from the current account;

must be assessed in light of tax implications, available cash flow and wealth management objectives.