Category: Alternative Finance

Charging interest on a Directors’ Loan Account

Directors Loan

When you’re the director of a business, it’s likely that there will be occasions where you borrow money directly from your company, or inject your own capital into the business.

A Directors’ Loan Account (DLA) keeps track of this money owed between the company and its directors. In many companies, the account is in credit – i.e. the company owes money to the director. This can be due to directors injecting startup capital into the company, not drawing dividends they are owed, or other expenses that have been subsidised by the director.

In these situations, it’s worth considering charging interest on the balance that’s due. But how do you do this? And what impact does charging interest have for the director and company?

Understanding interest on Directors’ Loan Accounts

Let’s take a look at some of the rules around applying interest on DLAs, and the potential benefits this can bring to your company and tax planning.

  • Any interest paid re these DLAs will be deductible when calculating your company’s taxable profits. Because of this, it’s possible to achieve tax savings of up to 25%.
  • For the individual, a basic-rate taxpayer has a Personal Savings Allowance (PSA) of £1,000 and will pay 20% on the excess. So, paying interest is more tax-effective than declaring dividends. The PSA for a higher-rate taxpayer is £500.
  • The interest rate needs to be a commercial rate. In other words, the interest rate used must not exceed the rate you’d expect to see from a third-party lender.
  • Where interest is paid to an individual, basic rate tax needs to be deducted at source from any payment made to the director.
  • This tax is reportable to HM Revenue & Customs (HMRC) on a calendar-quarterly basis, with the amount deducted offset against tax due on the individual’s personal tax return. Where the company accounts are not drawn up to a calendar-quarter end, a fifth return is required up to the balance sheet date.
  • The company can take into account any interest due, but not paid, until up to twelve months later when calculating its own profits. However, the individual will only include as income any interest that’s actually been paid. Note though that ‘paid’ can include crediting to a DLA!. This can give a timing advantage.

Talk to us about maximising the tax benefits of your DLA

Any interest you receive is not subject to National Insurance Contributions (NICs) and is particularly tax effective when shielded by the Personal Savings Allowance (PSA).

The reporting requirements for interest on DLAs are no walk in the park.

How do you pay interest to a director or individual lender? CT61 – Steve J Bicknell Tel 01202 025252

Are you missing out on Qualifying Interest Relief? – Steve J Bicknell Tel 01202 025252

Understanding the Tax Consequences of s455 Directors Loan: A Guide for UK Business Owners – Steve J Bicknell Tel 01202 025252

Because of this, it’s a good idea to talk to us first, so we can make sure you have a workable system in place prior to making any payments. We can also give an opinion of the acceptability of the proposed rate of interest to pay, and how it measures up against current market rates.

Get in touch to talk about interest on your DLA.

steve@bicknells.net

How do you pay interest to a director or individual lender? CT61

A few basics first:

  1. CT61 does not apply when a company in the UK pays interest to another company in the UK
  2. If you are seeking loans or investment make sure you check the FCA rules as it could be a regulated activity
  3. CT61 payments are quarterly and based on when payment is made
  4. The rules are not optional
  5. Its a deduction of Income Tax paid directly to HMRC
  6. The lender may be able to get the tax back on their self assessment return
  7. The borrower should give the lender a statement showing the Gross, 20% Tax and Net payment – HMRC R185 Certificate of deduction of interest

What does CT61 apply to and what form do you need?

If your company or organisation pays interest, royalties, alternative finance payments, manufactured payments, relevant distributions or any similar recurring payment, you must generally make these payments after deducting Income Tax at the basic rate – currently 20%. You need to tell HMRC about these payments and pay the Income Tax that you’ve collected. Use form CT61 for companies.

If you are an LLP you must send a letter and clearly state that you are a LLP and quote your Unique Taxpayer reference with details of the payment made and the tax deducted to:

Self Assessment
HM Revenue and Customs
BX9 1AS

How do apply for CT61?

To get a CT61 you have to complete the e mail template

HMRC: Structured Email (tax.service.gov.uk)

Nil Returns

Unlike other taxes you don’t need to file Nil Returns (see ‘When must I send a CT61’ section of CT61 notes)

But if you do need submit a return you need to do it within 14 days of the return period

Penalties

The CT makes this a Corporation Tax return so penalties should be inline with Corporation Tax penalties

Time after your deadlinePenalty
1 day£100
3 monthsAnother £100
6 monthsHM Revenue and Customs (HMRC) will estimate your Corporation Tax bill and add a penalty of 10% the unpaid tax
12 monthsAnother 10% of any unpaid tax

steve@bicknells.net

Stop Wasting Spare Capacity, use it to buy property and other things

Stop Wasting Time Shows Warning Sign And Period

What happens to your spare capacity?

Its impossible to totally eliminate spare capacity, for example hotels statistically are at 77% occupancy in the provinces and 84% in London.

So 16% to 23% of hotel capacity is wasted, its time dependent so it can never be re-used.

How much time are you wasting?

What if you could take that unused capacity and bank it for future use? well you can with BBX

bbx

You can even use your spare capacity to buy UK Property

bbx-property

Find out more http://www.bbxuk.com/special/bicknell-business-advisers/

steve@bicknells.net

How can you spread your Tax Payments

Pay up.

With the next self assessment payment on account due at the end of July many tax payers are wondering if they can spread their tax payments.

HMRC say..

Contact HM Revenue and Customs (HMRC) as soon as possible if you can’t pay all your tax on time.

You may be able to either:

  • get more time to pay

  • pay your bill in instalments by direct debit

But HMRC are generally reluctant to agree time to pay unless there are exceptional circumstances.

So an alternative might to use interest free credit cards.

Here is some great advice from Martin Lewis

Do it right and credit cards are the cheapest way to borrow. You can get 0% for up to 27 months – yet get it wrong and you’ll be stuck in debt for years.

Done right, it’s possible to borrow at no cost.

  • Make at LEAST the minimum repaymentsEnsure you set up a direct debit for at least the minimum repayment as soon as you are accepted. Even though you’re paying 0%, you still need to make repayments. If you miss one, you will lose your 0% deal, so the rate will jump and you’ll get a £12 charge.

    However, don’t almost clear your card in full – clear it IN FULL if you can. For example, if you’ve £1,000 debt from spending on a credit card and pay off £999, the fact it’s not cleared IN FULL means you pay a month’s interest on the whole amount.

    So if you can nearly clear your card, do what you can to totally clear it (even if it’s a 0% spending card it’s a good habit to get into).

  • Clear the card within the 0% periodGo even one month beyond the promotional period and the rate rockets, so calculate the amount needed to clear the balance by then. For example, borrow £600 on a year’s 0% card, divide the spend by the number of months (£600 / 12) to get the monthly repayment – in this case £50 – and set up a direct debit to do that.
  • Diarise the end datesIt’s incredibly vital you make a note of the 0% end dates (or use the Tart Alert) to make sure you pay off the debt in time, or be ready to switch to a new Best Balance Transfer deal. If you forget to switch when the deal ends, the interest cost will swiftly outweigh the card’s benefit.

You can see Martins full advice at http://www.moneysavingexpert.com/credit-cards/best-0-credit-cards

steve@bicknells.net

What is the new Innovative Finance ISA? April 2016

crowdfunding concept

The Government like Crowdfunding and Peer-to-Peer Lending, so in April 2016 the Innovative Finance ISA is being introduced.

In summary, its aim is to increase the number of loans available through crowdfunding by giving a tax incentive to those providing the money. There is greater risk for investors as their investments won’t be brought into the Financial Services Compensation Scheme but the returns for investors will be much higher than traditional savings accounts.

Innovative Finance ISAs are expected to be available from 6 April directly through peer-to-peer lending platforms such as Zopa, Ratesetter and Funding Circle, or via selected fund platforms. They will have the same annual savings limit as regular ISAs, £15,240.

https://members.ratesetter.com/static/images/NESTA_infographic_v2.jpg

steve@bicknells.net

Contact Us

Small businesses to benefit from extended Funding for Lending scheme

3d concrete Bank Building on a white background

The Bank of England and HM Treasury have announced a two-year extension to the Funding for Lending Scheme.

The Bank and HM Treasury launched the Funding for Lending Scheme (FLS) on 13 July 2012. The FLS is designed to incentivise banks and building societies to boost their lending to the UK real economy.  It does this by providing funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to their lending performance.

The FLS allows participants to borrow UK Treasury Bills in exchange for eligible collateral, which consists of all collateral eligible in the Bank’s Discount Window Facility.

The Bank and HM Treasury announced an extension to the FLS on 24 April 2013, which was amended on 28 November 2013, on 2 December 2014 and on 30 November 2015.  This allows participants to borrow from the FLS until January 2018, with incentives to boost lending skewed towards small and medium sized enterprises (SMEs). 

Click to access fls_infog.pdf

http://i.dailymail.co.uk/i/pix/2012/08/01/article-2181972-14522597000005DC-724_306x423.jpg

Crowdfunders have also been able to access Funding for Lending via the Business Finance Partnership Program

http://cdn.crowdfundinsider.com/wp-content/uploads/2014/05/The-State-of-Crowdfunding-Infographic-The-Crowdfunding-Center-Q1-2014.jpg

 

steve@bicknells.net

Contact Us

 

 

 

Widening of Qualifying Loan Interest Tax Relief Rules

Entrepreneur startup business model

Often when you start a business you will need to borrow money personally to lend to your new company or buy shares.

You might borrow by increasing your mortgage.

You may be entitled to claim tax relief for interest paid on a loan or alternative finance arrangement used to buy:

  • shares in, or to fund, a ‘close’ company (contact your HM Revenue & Customs (HMRC) office if you are not sure if the company is ‘close’)
  • an interest in, or to fund, a partnership
  • plant or machinery for your work (but make sure you do not claim this interest twice, you will do if you have already deducted it as a business expense)

If you receive a low-interest or interest free loan from your employer for one of the above purposes you may be able to claim relief for any benefit taxable on you.

This is called ‘Qualifying loan interest relief’, HMRC have a helpsheet which gives further details HS340

In the 2014 Budget Qualifying loan interest relief was changed to include EEA state companies

steve@bicknells.net

 

Would you borrow from PayPal?

Bank loan

The PayPal Working Capital fund will be trialled in the UK this autumn, with a more extensive rollout scheduled for 2015. Merchants (including eBay sellers) will be able to repay their advance with a share of their PayPal sales via card payments.

PayPal Working Capital is a loan of a fixed amount, with a single fixed fee. There are no due dates, minimum monthly payments, periodic interest charges, late fees, pre-payment fees, penalty fees, or any other fees. When you apply, simply select the amount you want — up to the maximum you qualify for. You choose the percentage of your sales that will be deducted from your PayPal account. (Deductions are made the day following each day of sales.) You’ll pay this percentage of your sales until your balance is repaid in full. You only make payments when you get paid.

PayPal Working Capital state that Working Capital offers major advantages compared with traditional ways of funding a business:

• Funding in minutes – PayPal’s strong relationship with its business customers means we can approve an advance based on their PayPal sales history. This means the customer completes a quick online application – there’s no need to spend hours gathering information about their business. And PayPal can make a decision and provide the funds in minutes.

• Pay when you get paid – Unlike traditional bank loans, PayPal Working Capital allows a business to repay the advance with a share of their PayPal sales. If they have a day without any PayPal sales that’s fine – they don’t repay anything that day.

• No credit check – PayPal Working Capital is a merchant cash advance against future sales – it’s not a loan – so no credit checks are needed and the advance does not impact on the customer’s business or personal credit record. There is a single, fixed fee that is displayed to the customer before they sign up. There are no interest charges or late payment fees.

Is this something your business will be able to use? or want to use?

steve@bicknells.net

 

 

 

Would you like to borrow against a single invoice?

Close-up picture of an invoice

In August 2013, the UK Government became a Buyer of invoices on the MarketInvoice Platform, investing directly in UK SMEs looking to access working capital and grow their businesses.

Why is the Government investing funds through MarketInvoice?

The UK Government, via the Department of Business Innovation and Skills (‘BIS’) and as part of the ‘Business Finance Partnership’, has committed to using alternative finance providers to channel much needed growth funding to UK SMEs.  The scheme is investing £1.2 billion into increasing lending to small and medium sized businesses from sources other than banks.

How does it work?

Any company can use MarketInvoice provided its sells goods or services to other large businesses.

Its a ‘pay as you go’ service and you can see the estimated costs by using their calculator

Companies are vetted and the invoice must be to a large corporate not to other SME’s.

Its confidential so your customer will not know you have used MarketInvoice, if the customer doesn’t pay you will have to refund the investor.

So far £163m of invoices have been funded by MarketInvoice.

Of course it would be better if customers always paid quickly!

steve@bicknells.net