Tag: DLA

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