Companies often borrow from their directors, especially property companies as 100% loan to value loans may not be available from lenders.
If the company pays interest on the loan it will have to register with HMRC and prepare CT61 returns
The CT61 requires the company to deduct 20% tax on the interest.
The Director may be entitled to the interest tax free
Personal Savings Allowance
You may also get up to £1,000 of interest tax-free depending on which Income Tax band you’re in. This is your Personal Savings Allowance.
|Income Tax band
||Tax-free savings income
Savings covered by your allowance
Your allowance applies to interest from:
- bank and building society accounts
- savings and credit union accounts
- unit trusts, investment trusts and open-ended investment companies
- peer-to-peer lending
So the Personal Savings Allowance should cover Directors Loans as explained in accountingweb
If you are lending to your company you should make sure that its at a market rate and you may want to consider your security for the loan.
You could opt for a charge at Companies House but at the very least you should have a loan agreement.
If you have a Business and you want too borrow money, you will probably be asked to give a Personal or Directors Guarantee.
Most Directors don’t want to give guarantees as it makes them liable rather than their business and the purpose of having a limited company was to limit their personal liability.
So it’s a common dilemma.
What can you do to reduce your risk?
- Would you be prepared to pay a higher rate of interest? there are are lenders who for an increased rate will agree not to ask for PG’s or DG’s
- If you aren’t prepared to give a guarantee you should make this clear upfront with the potential lender, it will save time and money.
- Limit the terms of the Guarantee – don’t let the guarantee be unlimited or unconditional
- Agree terms for relief – for example when a % of the debt has been repaid
- Decrease the Guarantee if the business achieves specific goals, for example a target net worth
- Set rules for when the Guarantee can be called on for example when a set number of repayments are missed
- Avoid ‘Joint ans Several’ Guarantees as not all business owners may have equal shares
- Avoid co-signing by Spouses
- Avoid using your main residence in the guarantee
- Consider whether Personal Guarantee Insurance could be obtained and used
What are the benefits of Personal Guarantee Insurance in more detail?
It allows directors to balance their risk evenly, so that no one director is taking on all the uncertainty of guarantees being called upon in the future
It can provide the incentive needed to grow the company by borrowing essential monies
This type of insurance is flexible, and can be increased if necessary as your business grows
Personal Guarantee Insurance provides peace of mind to directors that the full value of their personal asset is not at risk
Start-up companies have access to funding that they might not otherwise be comfortable taking on
There have been many creative schemes promoted to contractors, entertainers and sports stars, basically using a limited company to make loans to connected parties to avoid tax.
HMRC have been attacking these schemes for years, for example the Boyle case
Philip Boyle v HMRC [TC03103] 2013
On the 16th September HMRC published Spotlight 26: Contractor Loan Schemes – Too good to be true
Contractors and freelancers are bombarded by promoters who make claims that they can help individuals take home as much as 80% to 90% of their income. Sounds too good to be true, that’s because it is.
So why is this considered to be tax avoidance? These promoters use schemes to reduce the amount of tax you pay on your income by making payments which purport to be ‘loans’ from a trust or a company. Normally, a contractor would receive the contract income directly and pay tax on it. These arrangements artificially divert the income through a chain of companies, trusts or partnerships and pay the contractor in the form of a ‘loan’. The ‘loans’ are claimed to be non-taxable because they don’t form part of a contractor’s income. However, in reality the ‘loans’ aren’t repaid and the money is used by the contractor as if it were his or her income.
HM Revenue and Customs (HMRC) view is that these schemes don’t work and strongly advises any contractor or freelancer who has used such a scheme to withdraw and settle their tax affairs. People who settle with HMRC avoid the costs of investigation and litigation and minimise interest and penalty charges on the tax which should have been paid.
Don’t be fooled by promoter websites..
The promoters’ websites and promotional literature claim that they are fully compliant and are HMRC approved. HMRC doesn’t view these arrangements as compliant and never approves any schemes.
Contractor loan schemes, of the sort described above, must be declared under the Disclosure of Tax Avoidance legislation. The promoter is required to pass the scheme reference number (SRN) to all the users who must put this on their tax return. A failure to show the correct SRN on your tax return will lead to additional penalty charges.
Don’t be tempted, HMRC are closing in on unpaid tax, they will find you!
It’s not uncommon for Directors personal expenses to get mixed up with business expenses, for example the director is out buying things for the company and picks up some items for themselves at the same time and it goes on the same bill.
In a perfect world the Director would just repay the cost of personal purchases to the company, but we don’t live in perfect world, so what are the options?
Directors Loan Account
You could post the cost to the Directors Loan Account. These accounts are normally repaid when the Director is paid either salary or dividends.
If the loan is not cleared by year end then the company will have to pay a temporary corporation tax charge of 25% and reclaim the tax when the loan is repaid using form L2P
There may also be a notional amount of interest (4%) charged as a benefit in kind on the loan.
Benefit In Kind
You could have the expenses as a benefit in kind, some benefits may even be tax free, here is a list of my favourite tax free benefits
- Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16) and you can use carry forward to pay in even more
- Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – new rules coming soon
- Mobile Phone – One per employee
- Lunch – Tax Free Lunch Blog
- Cycle Schemes – Cycle to Work Blog
- Fitness – Fitness Blog
- Parties and Gifts – Christmas Blog
- Parking – Parking Blog
- Business Mileage Allowance – 45p for the first 10,000 miles then 25p
- Long Service Award – A bit restrictive as you need 20 years service, the tax free amount is £50 x the number of years
- Eye Tests and Spectacles – The Eye Test must be needed under the Health & Safety at Work Act
- Suggestion Schemes – Suggestion Scheme Blog
- Insurance such and Death in Service and Income Protection – Medical Insurance Blog
- Travel Expenses – Travel Blog
- Working From Home – Working from Home Blog
Private Use of Company Assets
It may also be worth considering private use of company assets.
- The cost of the asset is allowed against Corporation Tax and you can claim Capital Allowances and the Annual Investment Allowance.
- The Assets could be purchased from the Director but they must be transferred at Market Value.
- The Benefit In Kind is generally 20% of the market value
A pension scheme can buy quoted or unquoted shares in a company based either in the UK or overseas.
An occupational pension scheme can buy shares in one or more of the employers participating in the scheme as long as both the following conditions are met:
- the total value of the scheme funds invested is less then 20% of the net value of the pension scheme funds
- the amount invested by the scheme in the shares of any one employer participating in the scheme is less than 5% of net value of the pension scheme funds
Any investment larger than this will be an unauthorised payment and both the scheme employer and scheme administrator will have to pay a tax charge on the amount above the limit.
So in theory, yes, it is possible, but in reality its likely to fail because:
- An independent ‘Arms Length’ valuation will be required, for an unquoted small business or start up this is extremely difficult as establishing a market value for the shares will be difficult and often a start up will have losses in the first few years
- The HMRC’s rules which govern all registered pension schemes (in particular the sections covering both taxable property and tangible moveable property) dictate that the combined shareholding in the unquoted company held between the pension fund, the member personally and any other connected persons must never exceed 19%, otherwise there would be enormous tax consequences for all concerned
- The company concerned must not (and never should be in the future) controlled by the trustees of the pension fund in conjunction with connected parties
If the business needs the money to buy commercial premises for its trade it would be easier for the pension scheme (SSAS) to lend the money, a SSAS can lend up to 50% of net scheme assets as explained in in this fact sheet from Curtis Banks
If you are over 55, you could also consider drawing down funds from your pension, the first 25% will be tax free.
Directors (participators in a closed company) often borrow money from their companies with the intention of paying a dividend to repay the loan.
If the loan is outstanding more than 9 months after the company year end, then an extra 25% corporation tax charge is due, this is the s455 tax which is refunded when the loan is repaid as explained in this blog
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.
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.
Let’s look at the case of Richard and Julie Jones v HMRC  UKFTT 1082 (5 December 2014).
They took a small salary and regular dividends from their recruitment company which was absolutely fine until the company got into financial trouble!
Their accountant (unethically but in an attempt to help their client) suggested they should re-write history and change the dividends to salary so that the liquidator couldn’t recall the dividends.
HMRC then decided to demand PAYE and NI and pursued Richard and Julie personally.
HMRC was refused the right to collect PAYE tax and NI due on the salary, not because the law didn’t allow it, but because it wasn’t possible for Richard & Julie to reclassify the dividends. They had been properly paid and the correct procedure followed. History couldn’t be rewritten and the dividends should have been changed to loans if the dividends were illegal.
Based on HMRC Statistics approximately 1 million employees have a company car, its the 2nd most popular benefit in kind. The most popular benefit in kind is Private Medical Insurance (2.2m employees).
Often employees will change cars or start/stop having fuel for cars during a tax year and the tax on company cars can be significant, you can use this HMRC calculator to assess the the tax.
HMRC have just introduced a new Check and Update Service for Employees so that you can make sure HMRC have the correct information
You may find that it would be better for your employer to give you a loan, beneficial loans up to £10,000 aren’t a taxable benefit.
There companies like Maxxia that promote salary sacrifice schemes for cars
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
Its very common in Small Businesses for the Directors Loan account to be overdrawn creating a Directors Loan.
If the loan isn’t repaid within 9 months of year end the company will pay temporary additional Corporation Tax at the rate of 25% on the balance outstanding.
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.
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
Until now there has been no set format for writing to HMRC to reclaim the s.455 tax but now you must use form L2P to enable a close company which has paid tax on a loan to a participator to reclaim that tax once the loan has been repaid, released or written off.
Click here to use form LP2