Directors often borrow from their companies and this incurs a temporary tax charge.
The rate of tax charged on loans to participators and other arrangements (currently 25%) is being specifically linked to the dividend upper rate, which will be 32.5% from 6 April 2016.
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
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.
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.
Acquisition costs need to split into capital and revenue expenses.
“Several tests have been developed through case law to ascertain whether expenditure is revenue or capital in nature. The ‘enduring benefit’ test, which originated from Atherton v British Insulated & Helsby Cables Ltd [1925] 10 TC 155, is one such test.
“In this case, that expenditure incurred with a view to providing the business with an ‘enduring benefit’ was not allowable as a trading expense. ‘Enduring benefit’ means that the expense will benefit the business not just in the year in which it is incurred, but also in the years that follow. [Taxation]
Capital Expenses
Legal costs for the property purchase
Property Acquisition Cost
Capital expenses are only recovered as part of the capital gains calculation when they are added to the purchase cost to reduce the overall gain.
Revenue Expenses
Mortgage arrangement fees
Legal fees on arranging loans
Lenders normally include valuation fees in their charges
Revenue expenses are charged to the P&L and are deductible against income tax/corporation tax.
When loan costs are material they would normally be amortised over the period of the loan in order to apply the matching principle of accounting.
You cannot deduct:
Expenses incurred in connection with the first letting or subletting of a property for more than a year. These include legal expenses such as the cost of drawing up a lease, agents’ and surveyors’ fees and commission.
Any costs of agreeing and paying a premium on renewal of a lease.
Fees for planning permission or registration of title on property purchase.
In August 2013, the UK Government became a Buyer of invoices on the MarketInvoice Platform, investing directly in UK SMEs looking to access working capital and grow their businesses.
Why is the Government investing funds through MarketInvoice?
The UK Government, via the Department of Business Innovation and Skills (‘BIS’) and as part of the ‘Business Finance Partnership’, has committed to using alternative finance providers to channel much needed growth funding to UK SMEs. The scheme is investing £1.2 billion into increasing lending to small and medium sized businesses from sources other than banks.
How does it work?
Any company can use MarketInvoice provided its sells goods or services to other large businesses.
Its a ‘pay as you go’ service and you can see the estimated costs by using their calculator
Companies are vetted and the invoice must be to a large corporate not to other SME’s.
Its confidential so your customer will not know you have used MarketInvoice, if the customer doesn’t pay you will have to refund the investor.
So far £163m of invoices have been funded by MarketInvoice.
Of course it would be better if customers always paid quickly!
Help to Buy was due to start in January 2014 but it’s been brought forward to start this week.
Here is a link to the 2013 Budget Info Graphic explaining how it works (the rules have been changed a little but it’s a good outline) – HM Treasury
Here is David Cameron announcing the scheme on the BBC on Sunday 29th September
A Help to Buy mortgage guarantee lets you buy a newly built home or an existing property with a deposit of only 5% of the purchase price.
Help-to-Buy will initially be available under the Nat West, RBS and Halifax brands.
Help to Buy mortgage guarantees will be open for loans not only to first time buyers but also to existing homeowners, and be available on new and existing houses with a value of up to £600,000. Buyers must have a 5% deposit.
The Government will guarantee the next 15% of the loan for a fee.
The Help to Buy mortgage guarantee will increase the supply of high loan-to-value mortgages.
The plan has drawn criticism from the International Monetary Fund and Business Secretary Vince Cable, who say it may spark a property bubble.
If you own a Buy to Let property as an individual rather than in a limited company it is worth maximising your borrowings against the Buy to Let because the interest will be a tax deductible expense.
It doesn’t matter how you borrow:
Mortgage on the Buy to Let
Personal Loan
Overdraft
Re-mortgage of your main residence to invest in your Buy to Let
So, for example, if you had a Buy to Let property with low borrowings against it and a mortgage on your main private residence, you could increase your borrowings on the Buy to Let and pay off your private residence mortgage.
But you need to be aware that the maximum you can borrow on the Buy to Let is the market value when it was first let.
Property investors are often unsure whether their interest is deductible. This depends on how the money is used. Use it to buy investment property and the interest is tax deductible. Use it for personal reasons and the interest is not deductible.
There is an exception to this rule: you can generally remortgage an investment property up to its original purchase price and the interest will be tax deductible, whatever you use the money for. For example, let’s say you bought a buy-to-let for £100,000 and the current mortgage is £60,000. You can borrow up to another £40,000 (if the bank will let you!) and all the interest will be tax deductible, no matter how you use it.
You will need to keep detailed records of the borrowing and interest for your tax returns.
Alternatively you might focus on paying off your main residence mortgage first to leave the borrowings high on the Buy to Let.
Good news, the exemption threshold for employment-related loans has been increased for 2014/15 from £5,000 to £10,000, as long as the balance is below this level there is no tax charge for employees or employers.
But there could be bad news for participators (Directors/Shareholders) who have been using one of these techniques to avoid the 25% temporary Corporation Tax charge:
1. Using a Partnership or LLP where the company is a partner or member as a way to get loans
2. Making arrangements that did not qualify as loans but the where value ended up in the hands on a participator
3. Making loans repaying them within 9 months and getting a new loan, the Bed and Breakfast approach
4. Transfers of assets
5. Loans channelled through third parties
New anti avoidance rules are coming, a consultation paper is planned for later this year aimed at minimising the scope for abuse and there will be new legislation in the Finance Bill 2014 and Finance Bill 2015.
I read with interest in the August edition of Accountancy Magazine (article by Guy Rigby) how Crowdfunding is gaining popularity, here are some examples:
In 1997 British rock group, Marillion, raised £38,000 from its fans to pay for its US tour. They then went on to use the same method to fund several albums
In 2010 Hotel Chocolat offered 3 year, FSA approved ‘chocolate bonds’ to its 100,000 tasting club members. Customers were invited to invest £2,000 for a gross annual return of 6.72%, or £4,000 for a return of 7.29% which were paid in regular deliveries of chocolate. The Bonds raised an incredible £3.7m for the company.
In 2011 Caxtonfx (foreign exchange) raised £4m from its bond issue
In 2012 Mr & Mrs Smith (travel website) are in the process of raising £4m from a 4 year bond with cash interest of 7.5%, or 9.5% if the ‘Smith loyalty money’ option is taken
In 2012 Pebble Technology, a Palo Alto based smart watch company used Kickstarter.com to raise $10m against forward sales of its Pebble watch
According to the article, quoting Simon Dixon, to be successful in crowdfunding there is a simple formula £££ = R + SC + E
Where the money raised depend on the strength of the rewards your offer (R), how much social capital you have (SC) and the emotion attached to your story (E)
Its early days, but could this be the future for some businesses, using their fans and contacts to access funding. Social Media and the internet are definitely playing a part in moving this forward.
I received my copy of CIMA – Excellence in leadership Issue 1 2012 today and I have been reading all about Supply Chain Finance.
I hadn’t heard of it before, the article explains how businesses like Travis Perkins have been working with Santander to find a way to help their suppliers.
Santander offer to pay the suppliers immediately for a fee and the client (TP) pays on their normal trading terms, this is better for the suppliers than factoring because it improves their working capital position and based on the article the fees are cheaper than factoring.
Its good for the client because they aren’t borrowing money either, but the client needs to have a good credit rating. Here is link for more details:
Final Salary schemes have pretty much ceased to exist, Stakeholder Pensions never really caught on, so the majority of us have one of the following:
Personal Pension Plan – most people have or have had one of these, its the kind of scheme where your IFA comes along every year, asks you how much risk you want to take and then invests your pension in a Managed Fund or similar.
SIPPs – Self Invested Personal Pensions – these are a little more expensive but you have a lot more control and you can invest directly into Commercial Property, borrow money to buy Property and you can make loans to unconnected parties
SSAS – Small Self Administered Scheme – these are generally a little more expense than both Personal Pensions and SIPPs but you have even more control and you can lend to your own company
Lets say you are 40% tax payer, you pay in £100k out of earned income, the tax man gives the tax back of £40k, so you have £140k to lend, because its short term lending against assets you will probably be paid interest at 10% to 15%, thats a pretty good return (I appreciate there are risks, as there are with everything in life and of course you should always take professional advice before doing anything).
If you are a business looking for funding perhaps borrowing from a SIPP or SSAS may be the solution, it certainly seems to be catching on. But just be careful who you choose to lend to and against what assets.
steve@bicknells.net
Correction – if you pay in £60k it will be topped up by £40k to £100k if you are a 40% tax payer
