How can you avoid being taxed on a directors loan?

tax free icon, red round glossy metallic button, web and mobile app design illustration

Directors loans are common particularly in a small limited company. Loans over £10,000 require an ordinary resolution and there are additional rules for loans over £50,000.

In general, the directors take a small salary, generally at £11,000 the tax free level for 2016/17 or £8,060 the NI and Tax free level, they then take dividends.

During the year the directors take out payments as they need them and periodically a dividend is repaid to offset the directors loan.

However, if the Directors Loan Account is not repaid within 9 months of year end then 32.5% tax will be charged as part of the corporation tax.

Section 455 CTA 2010 liabilities must be included in a company’s CT600 tax return. The S455 tax forms part of the calculation of tax payable by the company under Paragraph 8 Schedule 18 FA 1998.

When the loan is repaid the company can reclaim the tax.

A claim to relief under Section 458 is a claim for relief against the original tax charge for the AP in which the loan was made. The time limit for the claim is four years from the end of the financial year in which the loan is repaid, released or written off. COM53120

32.5% is a lot of tax to pay!! even if you can reclaim it later on

On top of that any interest free loan over £10,000 will be a benefit in kind! so you will get taxed on the notional interest set by HMRC.

What can you do to avoid this tax?


Provided you have distributable reserves, paying a dividend might solve the problem.

Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose

(1)A company may only make a distribution out of profits available for the purpose.

(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).

A distribution must be justified by

  1. The Company’s last published accounts
  2. Interim Accounts
  3. Initial Accounts

The problem with using this approach is that the directors loans may not match the share ownership so you might have to pay more dividends than you intended to or use you end up trying to justify the use of dividend waivers.

If you are thinking of waiving dividends, bare the following in mind:

  1. A formal Deed of Waiver is required, the Deed will say that the Dividend is Irrevocably Waived, it must be dated before the right to dividend arises, it must be signed and witnessed and filed with the company statutory records
  2. You should have a good commercial reason for the Waiver which could be to retain funds for a specific purpose and this could be stated in the Deed
  3. Don’t make a habit of waiving dividends as it will increase the risk of questions from HMRC
  4. Don’t give inducements to encourage Dividend Waivers
  5. Make sure your dividends are legal

The other point to note is that you will be taxed on the Dividends


You could choose to pay yourself a bonus but salaries will generally be the most expensive option because:

  • PAYE is 20%, 40% or even 45%
  • Employee NI is 12% then 2% (over £827 per week)
  • Employers NI is 13.8%

Write Off the Loan

Writing off the loan is expensive.

It is treated as a distribution for Income Tax Purposes and subject to NI and Class 1 NIC will be charged to company.

The write off will be disallowed for Corporation Tax purposes.

On the positive side the s455 tax will be released.

Get a external loan

If the directors loan is likely to be repaid and is relatively short term, it might be better to get a loan and repay the debt.

A small amount of interest could be cheaper than paying 32.5% and then waiting to claim it back.

But make sure you don’t get caught by the ‘Bed and Breakfast’ rules

HMRC were concerned that some participators were avoiding this tax by raising funds short term to repay an outstanding loan.  They would then draw a new loan very shortly afterwards – HMRC refer to this as “bed and breakfasting”. New anti-avoidance rules were therefore  introduced in 2013.

These new rules incorporate two provisions – the “30-day rule” and the “intentions and arrangements” rule.

30-day rule

This applies where within a 30-day period:

  • a shareholder makes repayments of their s455 loan; and
  • in a subsequent accounting period, new loans or advances are made to the same shareholder or their associate.

So basically prevents the use of ‘Bed & Breakfasting’

‘intentions and arrangements’ Rule

Relief is denied regardless of the 30 day rule, if prior to repayment there is an outstanding amount of at least £15,000 and at the time the amount is repaid to the company, any person intended to redraw any of that amount or had made arrangements to make a new withdrawal; and a new withdrawal is made.

The relief denied is the lower of the amount repaid and the amount redrawn.

Spot the VAT Ball!

They think its all over, it is now!
VAT (and Tax in general) can be a complicated and hard to understand.
The FT reported earlier this month..

A long-running battle between the UK taxman and betting minnow Sportech over VAT paid on a game called Spot the Ball between 1976 and 1996 looks as though it may, finally, be nearing an end game.

Spot the Ball, which was popular in the seventies, shows a scene from a football match and players are invited to mark where they think the ball should be.

Back in 2009, Sportech lodged a claim that it should not have been charged VAT on the game as Spot the Ball – in its view – was a game of chance and not a game of skill and therefore not subject to VAT.

The Court of Appeal has restored the decision of the First-tier Tribunal (FTT) that the ‘spot the ball’ competition was a game of chance. The Court of Appeal agreed with the FTT.
As a result of the decision, the cost of entering the game should have been exempt from VAT under VATA 1994 Sch. 9 group 4. The repayment claim arising in this case is reputed to be around £97m.

Is Flat Rate VAT the best option?

Stressed couple checking bills

There are lots of VAT schemes to choose from

Standard VAT Scheme – on this scheme the VAT is based on tax points from invoices

Flat Rate VAT Scheme – If your turnover is below £150k you could join the Flat Rate Scheme, this scheme applies a % to your sales to work out your VAT Liability, it can make VAT returns easier to complete and in can sometimes work in your favour as the Flat Rates may mean you pay less VAT, if you join in your first year of VAT registration you get an extra 1% off the rate for the first year.

VAT Cash Accounting Scheme – if your turnover is below £1.35m you can account for VAT on a Cash basis, this is particularly helpful if your customers pay you on slower terms than you pay your suppliers

Annual Accounting Scheme for VAT – if your turnover is below £1.35m you could join the Annual Scheme and complete one return for the year but you make either 9 interim payments or 3 quarterly interim payments

Retail VAT Schemes – These are specific schemes aimed at mainly at shops and help to overcome the issues of mixed vat rate goods

VAT Margin Scheme – The margin scheme relates to second hand goods and accounts for VAT on the margin, for example on the sale of cars

They will all produce different answers!

We have a Flat Rate comparison Tax Calculator that can help

Recently there have been lots of concerns about the Flat Rate Scheme

As reported by Rebecca Cave in accountingWEB

HMRC previously insisted that all consultants should chose the category ‘management consultants’ (flat rate: 14%), even if they were consultants in health and safety, employment, or marketing. Now those businesses who do not describe themselves as management consultants are free to choose the category ‘business services not listed elsewhere’ (flat rate:12%).

Another area that caused confusion was the advice in para 4.4 of the previous version of VAT Notice 733, that all engineering consultants and designers should choose the category for ‘architect, civil and structural engineer or surveyor’ (flat rate 14.5%).

So a new VAT Notice 733 has been issued

Are you using the best VAT Scheme for your business?


What do you expect from an accountant!

Time for the Expert!

The world of accountancy is changing quickly and the days of the dull lion tamer are running out fast

We aren’t all as extreme as the ‘The Accountant 2016’, we definitely don’t work for criminal gangs!

This is the image that I think a modern accountant should have, someone who can solve your problems

There are 2 key reasons why small businesses expect more from their accountant.

  1. In recent years we have seen a huge growth in Cloud Accounting Systems such as Sage One and Xero and automation of payments and bank feeds, its no longer enough for accountants just to provide book keeping or year end accounts and tax.
  2. Business owners want personalised, tailored partnerships with their accountant who need to be true business experts

As Paul Surtees MD of Capitalise says…

Rather than simply easing their professional burden, leading accountants are using technology to go beyond their core proficiency and provide value-added services to their clients.

“Technology is shaping the future of the profession”

This is particularly pertinent to those practitioners with SME clients, where technology is really shaping the future of the profession.
Previously technology had simply increased efficiency and decreased the margin of error.  Now, however, rather than just creating more time in the day to concentrate on value-add services, technology is also helping to actually deliver these new service areas.

For example, accountants are taking on the challenge of SME finance and using online funding comparison services to offer advice and funding matches for clients.

Not only do online marketplaces make it easier to find finance, they also allow accountants to give more thorough counsel on a full range of choices, from indepencent to alternative sources.

Suddenly a business, that would have otherwise just gone to their bank, is now turning to their accountant for advice on suitable peer-to-peer lending platforms.

Another great example of this shift is the use of collaborative software.  As accountants become more like an ‘acting CFO’ for a SME, so too must they become more integrated into the business.

“Changes are being made in real time”

The use of collaborative software allows accountants, and SME owners, joint access to the likes of balance sheets and sales pipelines, for example.  Not only does this allow changes to be made in real time, it also increases transparency for both parties.

Many businesses require the skills of professionals to oversee and direct financial operations. These professionals are referred to CFOs, chief financial officers, or financial directors (FD).

So what should your Chief Financial Officer be doing for your business…..

  1. The CFO should be able to look into to future to see what the future financial needs of the business will be
  2. He/She should negotiate funding facilities to ensure the business can manage its cash flow needs
  3. The CFO should be able to foresee the future tax consequences and risks of decisions
  4. He/She should help the business to achieve the best possible credit scores
  5. Identify ways to reduce costs and improve profitability
  6. Understand the business owners objective and focus the business on achieving those objectives
  7. Ensure financial and regulatory compliance
  8. Ensure accurate and timely reporting of management information
  9. Evaluate growth opportunities
  10. Apply corporate governance

What key questions should you regularly ask your CFO…..

  1. What is our cash cycle and how can we improve it – Cash Cycle Blog
  2. What Key Performance Indicators should we use and what are they telling us – KPI Blog
  3. How can we improve profitability – 15 ways to improve profitability Blog
  4. What is our Business Plan and is it the right plan – Business Plan Blog
  5. Can we reduce Overheads – 10 creative ways to reduce overheads Blog

Picture 1

Many smaller businesses and SME’s can’t afford a Full Time (or even in some cases a Part Time CFO or FD) but they need help with:

  • Business Plans
  • Budgeting and Forecasting
  • Cash Flow Management
  • Buy or Rent decisions
  • Capital Investment Appraisal
  • Accounting Procedures and Systems
  • Business Strategy
  • Busines Funding and Investment
  • KPI’s

Virtual FD’s fill this gap because:

  1. You only pay for what you need
  2. There is no employment contract
  3. It provides access to higher level of expertise (in theory)

But be careful who you choose. There is no law preventing anyone from calling themselves an accountant, and that as a result small businesses could be unknowingly paying someone without the necessary skills to handle their finances and help their business grow, who isn’t regulated or insured against risk.

So what experience does your accountant have to show that they have the skills to be your Virtual FD?

I am sure that in theory they have the technical skills but is that enough?

With the exception of CGMA (CIMA) accountants many accountants in practice have never worked in business let alone been a Finance Director!

The ACCA issued a warning back in 2014 after research from cloud accounting software provider ClearBooks showed just 8 per cent of small businesses considered an accountant’s qualifications when choosing one.

CIMA (Chartered Institute of Management Accountants) Members in Practice are monitored by CIMA for:

  1. Continuous Professional Development
  2. Anti Money Laundering Compliance
  3. Professional Indemnity Insurance
  4. Continuity Agreements
  5. Letters of engagement
  6. Ethical conduct

CIMA operates a Masters degree standard scheme of qualifying examinations for prospective members. It is active in promoting local education, training and management development operations, the promotion of new techniques through its research foundation and the dissemination of management accounting practices through publications and other media related activities. WIKIPEDIA

So what do you expect from your accountant!

What do you need to do to become self employed?

Business people group.

First, you should create a business plan.

Approximately a third of all SME’s in the UK don’t have a Business Plan, that’s about 1.5m businesses, here are some reasons why you should prepare one….

  1. Research by Exact Software shows that SME’s with Business Plans make 20% more profit
  2. Having a business plan doubles your chances of increasing profits, increasing revenue, attracting new clients
  3. A well-researched business plan which includes the right figures and realistic forecasts will reassure potential investors you are a sensible investment opportunity
  4. A Business Plan will help you set out and achieve your goals
  5. It will help you set goals for your managers and staff
  6. The Business Plan will help you plan your cash flow and forecast Capital Expenditure
  7. A Business Plan will help you secure Business Finance and Loans
  8. You can plan your succession strategy or prepare the business for sale
  9. A Business Plan tests the feasibility of your business idea
  10. It will help you plan for the recruitment of Staff

Your responsibilities

You’re responsible for:

Ask an Accountant for Help with…

  • Choose the right business structure for your business – most businesses start out as sole traders but once they start making profits convert to limited companies, this is because sole traders pay more tax than company structures
  • Choose the best VAT Scheme you might be better off with Flat Rate or Cash Accounting
  • Choose the most suitable accounting software
  • Don’t mix up Business and Personal Expenses – always have separate bank accounts
  • Reconcile your Bank Transactions regularly – its easy to forget what you have spent checking the bank account keeps you in control
  • Understand and manage your cash cycle – how long does it take to get paid and what credit terms do you suppliers give you?
  • Manage customer payments and make it easy to pay your invoices
  • Understand and Comply with rules like National Minimum Wage and Holiday Pay
  • Understand and set money aside for Tax, don’t be late paying your tax

Is it a business or a hobby?

Fotolia_45741373_XS cash

The criteria used to assess if an activity is a hobby or a business are:

  • The size and commerciality of the activity.
  • The frequency of the activity and transactions
  • The application of business principles.
  • Whether there is a genuine profit motive.
  • The amount of time devoted to the activities.
  • The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).

HMRC have some great examples to help you decided, for example

Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.

In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.

She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.

She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.

Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality.

She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT.

Last year HMRC sent 14,000 letters to traders suspected of running a business and failing to declare this on their tax returns.

Of these, 1,000 letters were sent to people where the taxman has already identified a shortfall on their self-assessment forms.

Some of those targeted make as little as £100 profit online.

HMRC have extensive guidance at

From April 2017, there will be two new tax-free £1,000 allowances – one for selling goods or providing services, and one income from property you own.

People who make up to £1,000 from occasional jobs – such as sharing power tools, providing a lift share or selling goods they have made – will no longer need to pay tax on that income.

In the same way, the first £1,000 of income from property – such as renting a driveway or loft storage – will be tax free.

Under the new allowances, from April next year individuals with property or trading income won’t need to declare or pay tax on the first £1,000 they earn from each source per year. Should they earn more than that amount they will have to declare it, but they can still take advantage of the allowance.

Should you be declaring your Hobby (Business) to HMRC?


Where can you find a trusted professional?

An overworked office worker

The internet is full of sites that allow you to search a list of ‘trusted’ experts and get quotes.

But you are choosing from a select few who have decided to pay for leads, that doesn’t necessarily mean they are the best choice.

Most organisations will have google recommendations and feedback which does help although some sites only show positive feedback.

I have recently came across

The Association of UK Accountants has recently partnered with Bark.

“People turn to Bark every day to find pros to help them with everything from lawn mowing to legal representation,” says Bark cofounder Kai Feller. “We’re committed to finding the highest quality professionals for our users, and this new partnership with the Association of UK Accountants will make it even easier for us to help entrepreneurs throughout the UK find quality business accountants.”

Bark How it works


There are lots of great things about Bark

  1. It shows Google Reviews
  2. Its not limited just to a select few who have paid to be on the list
  3. You get multiple quotes and a price guide

Bark BBA


HMRC continue to target small businesses – are you ready for a visit?

I want you

According to recent reports HMRC has increased the number of small business investigations and they continue to be seen as soft targets.

About 7% of tax inspections are random, the majority are triggered because HMRC believes that something is wrong.

What can you do to reduce your chances of being selected:

1. File your tax returns on time and pay what you owe – If you file late or at the last minute HMRC will think you are disorganised and as such there are more likely to be errors in the return

2. Declare all your income – HMRC get details of bank interest and other sources of income, sometimes they test them and match them to returns

3. Use an accountant – Unrepresented taxpayers are more likely to be looked at, mainly because many of them don’t know what they are doing

4. Trends – if your business doesn’t match the profile of similar business in the same sector or your results suddenly fluctuate it could raise concerns at HMRC, for example, if you suddenly request a VAT refund

You might also consider tax investigation insurance, FSB include tax investigation insurance as a member benefit, they also have some great advice if you do get selected

Have you paid unlawful dividends by accident?

Regretful businessman in prison

Mistakes can happen even to large companies like NEXT PLC

Whilst the Company always had sufficient reserves to pay the Relevant Distributions at the time that they were made, the Act required this to be demonstrated by reference to interim accounts filed at Companies House prior to payment. Regrettably, those interim accounts were not filed with Companies House until after the Relevant Distributions had been paid and after the lapse had been identified.  No fines or other penalties have been incurred by the Company.

So what are the rules….

Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose

(1)A company may only make a distribution out of profits available for the purpose.

(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).

A distribution must be justified by

  1. The Company’s last published accounts
  2. Interim Accounts
  3. Initial Accounts

In small businesses having the right paperwork is vital should HMRC raise any questions, you will need:

  • Board Minutes
  • Dividend Vouchers

HMRC changes the rules again on the Employment Allowance!

Business team.

The employment allowance was introduced in April 2014 and employers can save up to £3000 in employers national insurance.

The problem is that HMRC wanted to stop one-person businesses from getting the allowance and from the 6th April 2016 new rules came into place.

However, many one-person business thought that employing another person, for example their Spouse would get round the rules.

So HMRC have tightened the rules a bit more in their Employer Bulletin April 2016 and set out the rules for employing another person.

employment allowance