Tag: Directors Loan

What if you borrow more than £10,000 from your company?

Directors sometimes borrow money from their company, when this happens there are several tax issues:

CT600A S455 CTM61505 – loans not repaid with 9 months of year end are taxed at 32.5%

Broadly, where a close company (either directly or through an intermediary):

  • makes any loan to,
  • advances any money to, or
  • confers a benefit on,

an individual who is a participator (or an associate of a participator) in the close company, then the close company is due to pay tax under CTA10/S455. The exception to this (in the case of a loan or advance) is if the loan or advance was made in the ordinary course of the close company’s business and that business includes the lending of money (see CTM61520). S455 applies only if the company is a close company at the time the loan or advance is made.

Although the company is charged to tax under CTA10/S455 “as if it were an amount of CT…”, this does not mean a loan or advance is, by itself, a distribution of the company or income in the hands of the recipient.

As regards:

  • the tests for determining whether a company is a close company, see CTM60100 onwards,
  • the meaning of loan or advance, see CTM61535,
  • the definitions of participator and associate of a participator, see CTM60107 onwards,
  • the exclusion of certain loans to directors or employees, see CTM61540,
  • the meaning of ‘confers a benefit’, see CTM61580,
  • reciprocal arrangements, see CTM61550 to CTM61555,
  • extension of CTA10/S455 to loans by controlled companies, see CTM61700 to CTM61750

New tax procedure for Directors Loans (s 455) – Steve J Bicknell Tel 01202 025252

Benefit in Kind – If the loan was more than £10,000

If you’re a shareholder and director and you owe your company more than £10,000 (£5,000 in 2013 to 2014) at any time in the year, your company must:

You must report the loan on a personal Self Assessment tax return. You may have to pay tax on the loan at the official rate of interest (or pay interest to the company on the loan)

The Current Official Rate of Interest is 2.5% Beneficial loan arrangements – HMRC official rates – GOV.UK (www.gov.uk)

Loans over £10,000 need Shareholder Approval

A private company may make a loan to one of its directors, or give a guarantee or provide security in connection with a loan made by a third party to such a director. However, the transaction must first be approved by an ordinary resolution of the shareholders.

Exception for loans under £10,000 in aggregate

If the aggregate value of the loan and other related loans to a director does not exceed £10,000, there is no need to obtain shareholders’ approval (note that the £10,000 is an aggregate value, meaning that if a multiple of small loans to a director combine to a value over £10,000, it would require shareholder approval.)

Notes in the Accounts

Related party transactions are noted in the accounts, this even applies to Micro Entity Accounts.

steve@bicknells.net

FRS102 Directors Loan rules to be simplified

FRS102 which is now the UK’s main reporting standard has some really odd rules and in my view the rules for interest free loans are complete madness!

Take a simple example of a £5,000 interest-free loan repayable in three years’ time:
if the market rate for such a loan was, say, 7% then the present value of the loan would be £4,081 (£5,000 x 1/(1.07)3).

Unfortunately, FRS 102 does not contain any requirements about how the above financing shortfall of £919 should be accounted for on initial recognition. It is therefore necessary to consider the particular facts in order to determine the accounting treatment.

In simple terms, the financing shortfall of £919 is either interest income or an interest expense when the loan is made. That then reverses as interest receivable or payable as the discounting unwinds.

– See more at: http://www.icaew.com/en/members/practice-resources/icaew-practice-support-services/practicewire/news/frs-102-and-interest-free-loans#sthash.tm8iReHG.dpuf

This is crazy, because we all know the value of the loan is £5,000, it’s not £4,081!
It looks like the FRC now agree and we are getting FRED67 to amend the rules for Directors
Basically the new rules will allow loans to be reported at the their transaction value rather than their fair value, in other word we don’t need to assess notional interest.
FRED 67[2] proposes a number of amendments to FRS 102, in response to calls from stakeholders, intended to simplify it and make it more cost-effective. This includes permitting small entities to initially measure a loan from a director who is a natural person and a shareholder in the small entity (or a close member of the family of that person) at transaction price. FRS 102 currently requires such loans to be initially measured at present value, with the discount rate being a market rate of interest for a similar debt instrument.
This does of course still leave us with the old rules for inter company loans and loans from directors who aren’t stakeholders, but hopefully the FRC will bring in further simplifications.

HMRC Directors Loan 2016 Rules

Young woman with checklist over shoulder shot

The latest version of the Directors Loan Tool Kit for 2015-16 was published in May 2016, official the guidance is voluntary, but I am not sure that tax inspectors will consider as voluntary!

Here is a link to the full tool kit

Click to access 2015-16_DLA_Toolkit_rev.pdf

Here are some things to watch out for when preparation your accounts

DLA 3

DLA 1

DLA 2

 

steve@bicknells.net

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?

Dividends

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 https://stevejbicknell.com/tax-calculators/

Bonus

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.

 

steve@bicknells.net

What if you write off an intercompany or directors loan?

with computer

Connected party loans are a problem area especially if the loan is impaired (ie the borrower may not be able to repay the debt)

Individual Loans written-off

If an individual makes a loan to a company and this is subsequently written-off, the company will have a non-trading loan relationship credit equal to the amount written off.

If the loan was made to an unquoted trading company, the individual will crystalise a capital loss equal to the amount of the loan written off. This will be available to set off against capital gains arising in the year of write-off or in subsequent years.ACCA

The situation, however, becomes more complicated where the parties are connected. The general rule is that where the debtor and creditor in a loan relationship are connected in any part of an accounting period and the whole or part of a loan is written off, then this is effectively a ‘tax nothing’, ie the creditor company cannot claim relief for the amount of the loan written off and the debtor company does not incur a taxable loan relationship credit.
There is, however, an exception to the above when the creditor company is in insolvent liquidation; a creditor company may claim an impairment loss in these circumstances.

 

Loans swapped for Shares

Often Loans are swapped for equity and then subsequently a claim for negligible value is made.

A negligible value claim enables you to set a capital loss against your income (or against other capital gains if you have them) for earlier years and claim a tax refund.

Many negligible value claims are made by shareholder directors whose company has failed. Their claim is to offset the loss on the shares in their company against their directors’ wages for earlier tax years.

When a taxpayer owns shares which become of negligible value the taxpayer may make a claim under s24 TCGA 1992, resulting in a deemed disposal and reacquisition, which crystallises a capital loss.

Intercompany Loans

Accounting standards require companies to assess their assets at the end of each period to ascertain whether there is objective evidence that particular assets are impaired.  So if a loan can’t be repaid it would be impaired and may require a provision for bad or doubtful debts at the year-end which may well lead to the eventual release of the loans in question.

The problem is that for connected businesses this can create a double whammy on tax! tax relief is denied in respect of the debit to the creditor company’s profit and loss account.  The credit recognised in the debtor company’s accounts can be taxable.

Where the creditor and debtor are connected companies, the connected party rules will apply to the release. This means that the release debit in the creditor’s accounts will not be allowable, because of CTA09/S354. Similarly, the credit in the debtor company’s accounts will not be taxable, since CTA09/S358 applies, unless the release is a ‘deemed release’ as defined in CTA09/S358(3) (CFM35440) or a ‘release of relevant rights’ under CTA09/S358(4) (CFM35510).

Since the release is, for both parties, dealt with under loan relationships, the priority rule in CTA09/S464 means that the creditor’s loss cannot be claimed, nor the debtor’s profit taxed, under the normal provisions for trading income. Nor can the credit in the debtor’s accounts be taxed under CTA09/S94 (debts incurred and later released).

Trade debts or loans between companies within a group may not uncommonly be released when either the debtor or the creditor company (or both) is dormant, as part of a ‘tidying-up’ exercise to enable dormant companies to be struck off. If this is all that happens, HMRC would take the view that the recording of an accounts profit – which is not taxed – in a dormant debtor company does not result in that company starting to carry on a business, and therefore does not start an accounting period under CTA09/S9. HMRC CFM41070

Two companies are connected for an accounting period if one controls the other or both are under the control of the same person (s 466) and companies are connected for the whole of their respective accounting periods if the control test is met at any time during those periods.

One possible solution could be a Deed of Release or Waiver executed in the accounting period in which the loan is released, but this would need to be properly drafted. The credit to the debtor company’s profit and loss account will then be able to be treated as non-taxable and as such avoid the double tax treatment.

steve@bicknells.net

Contact Us

Trade away your Overdrawn Directors Loan

For those who haven’t heard of Bartercard.

Bartercard is the World’s largest business to business Trade Exchange servicing over 75,000 trading members across 6 countries with the World’s largest computerised Barter Network

http://www.bartercard.co.uk/about

Basically members exchange goods and services instead of cash and a Trade Pound has the same value as a Pound Sterling.

Bartercard is reported in your accounts in the same way as a Bank Account.

My Bartercard contacts tell me that currently one of the most popular ways to use Bartercard is to repay Directors Loans, the Director sells or auctions personal items, selling via Bartercard is easy and members are always keen to buy, they then use the Trade Pounds to repay the Directors Loan.

I know you might say why don’t you just sell for cash, which you could do, but because some products such as electrical items are in short supply in Bartercard, on the auction site (much like EBay) they will almost certainly be sold for a premium price.

Once you have paid off your directors loan you may be eligible for a Corporation Tax refund. http://stevejbicknell.com/2012/01/02/pay-off-your-directors-loan-and-reclaim-corporation-tax/

steve@bicknells.net

 

Directors Loan v’s Private Use of Company Assets

Many Directors borrow money from their Limited Company, but there are 2 key costs:

If, your company, purchased assets and you used those assets privately, the treatment is much more favourable:

  • The cost of the asset is allowed against Corporation Tax and you can claim Capital Allowances and the Annual Investment Allowance

From April 2012 the rates of capital allowances have been reduced from (a) 20% to 18% and from on the Main Rate Pool (b) 10% to 8% for  ‘special rate’ expenditure respectively. At the same time the maximum amount of the Annual Investment Allowances (AIA) will be reduced to £25,000 a year (currently £100,000).

  • The Benefit In Kind is generally 20% of the market value http://www.hmrc.gov.uk/paye/exb/a-z/a/assets-available.htm#2
  • So, based on buying an asset for £10,000 – there will be saving in Corporation Tax of £2,000 and the Benefit In Kind Tax of £1,076, thats a net saving in year 1 of £924 compared to a cost in year 1 of £2715.20 on a loan (total difference £3,639.20), although the benefit in kind will be £860.80 more expensive in future years.

The Assets could be purchased from the Director but they must be transfered at Market Value.

According to Indicator ‘Tax Breaks for Directors’ assets owned by companies include antiques, paintings, furniture, business suits (but not vehicles) and the 20% benefit in kind amounts can be deducted from the value of the asset should it subsequently sold to an employee or director.

Generally you can only reclaim VAT on the purchase of Assets for Business Use http://www.hmrc.gov.uk/vat/managing/reclaiming/private-use.htm

steve@bicknells.net

Pay off your Directors Loan and reclaim Corporation Tax

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.

http://www.hmrc.gov.uk/ct/managing/director-loan.htm#5

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

steve@bicknells.net