Many directors lend money to their businesses, especially during the start up phase.
But did you know the company can pay you interest net of 20% – the tax deducted at source is reported and paid each quarter using form CT61
Form CT61 cannot be downloaded or ordered online. To order a form, you need to phone the HMRC Accounts Office Shipley on Tel 01274 539 665.
Here is a link to the HMRC notes on Form CT61 http://www.hmrc.gov.uk/ctsa/ct61-notes-2010.pdf
If the loan is from a family member and they are a non taxpayer they won’t be able to use form R85 but they will still be able to claim the tax back either by contacting HMRC 0845 366 7850 or by filing a self assessment return
Interest payments are not subject to National Insurance and can be a tax efficient of recieving part of your income from your business.
The income will need to be reported on your self assessment return.
The interest charges will be tax deductable by the Company.
You may also consider registering your loan with Companies House as a Debenture, here is a link to help you register your charge http://www.companieshouse.gov.uk/infoAndGuide/faq/companyCM.shtml
This will make the you ‘the lender’ a secured creditor but you may have to take a secondary position behind your bank or other lenders or if other lenders are already lending you may need their permission to register a charge.
If you’re a company director or ‘participator’ and take money out of your company that’s not a salary or a dividend – over and above any money you’ve put in – you’re classed as having received the benefit of a director’s loan.
If your director’s loan account is not paid off in full within nine months after the end of your company’s accounting period:
- You must include details of the loan in your Company Tax Return.
- Your company must pay Corporation Tax on the loan – the current tax rate for directors’ loans is 25 per cent of the loan.
The good news is that you can reclaim the tax when the loan is repaid (often by paying a Dividend to clear the balance outstanding).
How you do this depends on timing:
- if your claim is made within 24 months of the end of that accounting period you can amend and resubmit an amended Company Tax Return for that previous accounting period
- if your claim is made more than 24 months after the end of the previous accounting period you can make a separate claim by writing to HMRC at the same time as you file your Company Tax Return for your most recent accounting period
The Claim was previously known as a S419 claim (S419 ICTA 1988) but its now covered by S455 and S458 Corporation Tax Act 2010
When writing to HMRC makesure you give them as much information as you can for example:
UTR – Unique Taxpayer Reference
Company Name and Details
Amount being reclaimed
Details of the relevant Corporation Tax Returns on which the Directors Loans are shown
Your Bank Account Details for the Refund
You would be surprised at how many businesses never reclaim the S419 tax! makesure you don’t miss out
When you are Self Employed your pay tax in advance in January and July, but Companies pay tax 9 months after their financial year end.
So if you formed a Company and it started trading in April 2011, its year would end 31st March 2012 and Corporation Tax would be due in December 2012.
As a director of your own company you will be paid as an employee (PAYE) and get paid dividends as a Shareholder. Dividends are paid out of taxed profits.
What this means is that a Director taking a minimal salary, will probably have a tax break of 12 plus 9 = 21 Months.
In addition the company will buy the assets of the sole trader and it may be possible to include a value for goodwill.
Its often worth having a Tax Group even if you don’t have Group Accounts ie you have multiple businesses under common control but that are not directly owned subsidiaries. The reason for this is to offset profits and losses to reduce the total tax payment.
Generally this means completing a special extra return, the CT600C, unfortunately, this form is not available from HMRC to file on line.
There is a solution regulation 6 SI199/2975 (CTM97690) allows you to write to HMRC and explain which companies make up the group and ask for a simplified arrangement – meaning HMRC will automatically net off the returns with out the need for CT600C returns.
By doing this you can file the CT600’s on line for free with HMRC.