Do you get relief for unpaid loans? Bad Debts

Lending directly to businesses or via Peer to Peer platforms is becoming very popular, but what happens if the borrower goes bust and can’t repay you?

HS296 Debts and Capital Gains Tax (2019)

https://www.gov.uk/government/publications/debts-and-capital-gains-tax-hs296-self-assessment-helpsheet/hs296-debts-and-capital-gains-tax-2019

Losses on loans to traders

If you make a loan to a trader you may be able to claim an allowable loss if the loan cannot be repaid. The loan must have been used wholly for trade purposes and have become irrecoverable. You cannot claim if the borrower was your spouse or civil partner, either when the loan was made or subsequently.

Example 1
You lend £30,000 to your brother to start a bicycle shop. After trading successfully for a number of years, the business fails. £5,000 of the loan is repaid to you but £25,000 is irrecoverable. You can claim an allowable loss of £25,000. If you claim the relief you’ll be taxable on any amounts of the loan subsequently repaid.

Example 2
Two years after you make the claim your brother is able to repay £10,000. You’re treated as having made a capital gain of £10,000 in the tax year in which the £10,000 is repaid.

Loans that qualify

To qualify for relief the loan must be to a borrower who:

is resident in the UK

uses the money wholly for the purposes of a trade

uses the money to set up a trade, as long as they start trading

A trade includes a profession or vocation, but does not include money lending. If the loan is made to a company, that company can pass the money to another company in the same group to be used in that other company’s trade.

Loans may include credit balances on a director’s loan account but not ordinary trade debts. Exceptionally, trade debts may qualify for relief if there’s a specific agreement to extend the period of credit beyond what’s customary for the trade concerned. But you cannot claim an allowable loss if you’ve claimed the bad debt as a trading expense.

Peer to peer lending

https://www.gov.uk/guidance/peer-to-peer-lending

How peer to peer lending works

Lenders place their money with a peer to peer platform which is then lent to lots of different borrowers as many small loans. Each borrower borrows small amounts from many different lenders to make up the full loan they need. The platform will collect the repayments of interest and capital from each borrower and pass them to the lenders.

Claiming tax relief on unpaid loans

If a peer to peer loan isn’t repaid the lender can set the loss they suffer on the loan against the interest they receive on other peer to peer loans before the income is taxed.

Tax relief is available to peer to peer lenders who:

are liable to UK Income Tax on their peer to peer income

make loans through peer to peer lending platforms that are authorised by the FCA

are the legal lender at the time when its agreed that the loan has gone bad

When relief can be obtained

Tax relief applies when there is no reasonable prospect of the peer to peer loan being repaid, it doesn’t apply to late payment.
The amount of relief available is the peer to peer loan still outstanding from the borrower, less repayments already received.

Relief for bad debts on peer to peer loans can only be set against interest that the lender receives on other peer to peer loans, it cannot be used against any other form of income.

steve@bicknells.net

If it looks like a loan, it is a loan!

Contractors and Business Owners have been using Loans as disguised remuneration for decades.

Basically, a loan isn’t income so schemes have been created to lend money through various means. HMRC view these as tax avoidance.

How contractor loans work

In a contractor loans scheme you’re paid in the form of a loan from a trust or company, sometimes referred to as a remuneration trust.

You don’t get your payment (or ‘loan’) directly from the company you’re providing work for because it’s diverted through a chain of companies, trusts or partnerships.

The companies that promote these schemes will tell you this will save you tax.

Why these schemes could cost you more

Scheme promoters will tell you that the payment is non-taxable because it’s a loan, and doesn’t count as income.

In reality, you don’t pay the loan back, so it’s no different to normal income and is taxable.

So if you’re using one of these schemes and being paid this way you’re highly likely to be avoiding tax. You could end up paying additional taxes, penalties and interest as well as a fee to the promoter.

https://www.gov.uk/guidance/contractor-tax-loan-schemes-can-cost-you-more

What if its not called a loan?

Contractor Weekly reported this week that Contractors are now being advised to say that they holding funds in ‘fiduciary capacity’ on behalf of the company.

According to their article calling a loan by a different name doesn’t impress HMRC, it looks like a loan so it is a loan!

It is recommended that you tell HMRC about these schemes by e mailing exitstream.counteravoidance@hmrc.gsi.gov.uk

If you are using one of these schemes HMRC will be looking for you!

steve@bicknells.net

If my company pays me interest will it be taxed?

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

Click to access ct61-notes-2010.pdf

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
Basic rate	£1,000
Higher rate	£500
Additional rate	£0

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

https://www.accountingweb.co.uk/tax/business-tax/paying-interest-to-the-director

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.

steve@bicknells.net

How can you limit a Directors/Personal Guarantee?

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

http://www.begbies-traynorgroup.com/articles/director-advice/what-is-personal-guarantee-insurance

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

steve@bicknells.net

Why it’s time to end Offshore and Contractor Loan Schemes?

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!

steve@bicknells.net

What are tax implications if a company pays a Directors personal expenses?

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

steve@bicknells.net

Can my Pension buy shares in my company?

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.

https://www.gov.uk/pension-trustees-investments-and-tax

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.

steve@bicknells.net

How does s455 tax apply to Directors Loans? what if you ‘bed and breakfast’ the loan?

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

New tax procedure for Directors Loans (s 455)

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 change a dividend to salary

Let’s look at the case of Richard and Julie Jones v HMRC [2014] 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.

steve@bicknells.net

How you can update HMRC on your company car details

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.

http://cccfcalculator.hmrc.gov.uk/CCF0.aspx

HMRC have just introduced a new Check and Update Service for Employees so that you can make sure HMRC have the correct information

https://www.gov.uk/update-company-car-details

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.

https://www.gov.uk/expenses-and-benefits-loans-provided-to-employees/whats-exempt

There companies like Maxxia that promote salary sacrifice schemes for cars

http://maxxia.co.uk/asset-finance/car-salary-sacrifice/

steve@bicknells.net