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.
- 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:
- treat the loan as a ‘benefit in kind’
- deduct Class 1 National Insurance
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.