Directors Loans

Directors Loans

posted on July 14, 2018

by: Ian Marlow / 0 comments / BusinessCompany AccountsStarting A Business

Directors Loans can cause tax complications which many small business owners are unaware of. In fact they often only come to light when accounts are prepared and it is realised that the owner/director has withdrawn more cash than legitimately be taken in dividends. The actual making of the loan in itself does not trigger any tax charges though care should be taken that the loan is not treated as a salary payment. If it is be treated as salary then PAYE must be applied at the time the funds are made available to the director. So be careful in your descriptions of the withdrawal.
Then there are tax consequences for the period that any directors loans are outstanding.  The director will incur a benefit in kind charge if the loan exceeds £10,000 at any time during the tax year.  If the director pays interest to the company the benefit can be reduced and even eliminated but there are certain conditions attaching to this.  The company itself will have what is known as a section 455 liability (based on the section of the relevant legislation) if the loan remains outstanding for more than 9 months and 1 day after the end of the accounting period in which the loan is made.  The s455 tax is currently 32.5% of the amount of the loan outstanding at that time.
If the loan is repaid by the director/shareholder the company will obtain a refund from HMRC of the s455 tax that has been paid. This is repayable 9 months and 1 day after the end of the accounting period in which the loan is repaid. So you end up making a lengthy interest-free loan to the government! In recent years the introduction of specific anti-avoidance legislation has tightened up abuse of the loan rules so you need to be careful not to use the company as a source of personal loans to directors.
Company law states that a company making directors loans must seek the approval of its shareholders though there is an exception to this if the loan is less than £10,000. Technically, the company may require immediate repayment of the amount borrowed but that is unlikely to happen with a small owner-managed company. If the loan is later written off, then further tax implications arise.  The director/shareholder is treated as receiving a dividend equal to the amount of the loan which is charged to income tax.  The amount written off is also subject to Class 1 NIC.
You can understand why HMRC would want to discourage companies directors loans, especially if the company is in financial difficulty. So beware of being caught by the loan rules. The best way in our option is to keep your accounting records up to date so that you know how much you can withdraw safely from the company at any time.

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Ian Marlow

Managing Director

Ian Marlow, an Elite Advisor for Quickbooks Online, has a passion for helping individuals and businesses in all aspects of online accounting and leads an experienced team of tax and accounting professionals.
14th July 2018
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