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Author: admin | Category: Lease Car Calculator | Date: 08.10.2014

This guide explains what a director’s loan is and the Corporation Tax implications for your company.
It also mentions possible Income Tax implications of directors’ loans for you and your company. HMRC will charge interest on the amount unpaid – interest runs from the normal payment date for the accounting period in which the loan was made, to the earlier of the date the tax is paid or the date the loan is repaid. For example, your company’s accounting period runs from 1 April 2008 to 31 March 2009.
If your director’s loan account is overdrawn there may also be Income Tax and National Insurance implications for you and for your company. If your company pays you interest on your director’s loan, there are Income Tax implications for you and your company. You must show the interest you’ve received as income on your Income Tax Self Assessment tax return. Your company must pay this interest to you only after withholding Income Tax at the basic rate – currently 20 per cent.
In a small business’s early days the business owners may loan money to the company when other sources of funding are hard to come by, but as the company grows they may want to take money out of the business. These are the steps a business owner should take when borrowing money from their own business. While most standard Articles of Association permit a company to loan money to a director, it is worth checking your company’s own Articles before arranging the director’s loan. The company can agree to offer the director an interest-free loan, or charge interest below the official interest rate, but it is important to bear in mind that this will represent a beneficial loan agreement and could result in a tax liability for the director. The Director’s Loan Account is used to record any money directors pay into or borrow from their company. Business owners must include the details of any director’s loans on their self-assessment tax returns, and may have to pay tax on the difference between the official interest rate and the interest rate agreed on the loan, since a beneficial rate is recognised as a benefit in kind. The company is required to report the director’s loan to HMRC using form P11D, and must also include the details of the loan on its balance sheet when it files its annual accounts. If the loan was for an amount of ?5,000 or less the company will pay tax on the interest, assuming it wasn’t an interest-free loan.
If the loan has not been fully repaid within nine months of the company’s corporation tax accounting period the company must pay 25% of the outstanding loan amount as corporation tax. If the loan was for more than ?5,000, was fully repaid within nine months of the company’s corporation tax accounting period but a second loan of ?5,000 or more was taken out up to 30 days before or after the loan was repaid, the company must pay 25% of the original loan amount as corporation tax. Finally, if the company chooses to write off the director’s loan before it has been fully repaid the outstanding amount will be treated as income for the director, and will result in a corresponding income tax charge on the director’s self-assessment tax return.


It should now be clear that director’s loans often come with fairly complicated taxation and reporting requirements. Related articlesHow do you loan money to your company?Many new businesses struggle to raise startup capital until they have proven their business model and gained some traction.
For several years HM Revenue & Customs (HMRC) have been concerned that directors and shareholders of companies, referred to as “close companies”, have been able to avoid paying tax by abusing rules relating to loans made to directors, shareholders or other “participants” or indeed to their associates. But there was evidence of widespread abuse where a loan would be repaid one day and then a new loan granted the next – in effect providing tax-free income. To prevent this form of tax avoidance, current rules state that any loan to a participator (director, shareholder, loan creditor or their families or associates) that remains outstanding for more than nine months after the end of the accounting period in which the advance was made results in a corporate tax charge. The new rules will apply where a loan from a close company is made via an intermediary such as a partnership, a Limited Liability Partnership or a trust.
The proposed legislation will seek to create a tax charge in arrangements where value is received directly or indirectly by an individual and the new rules will also close a loophole where companies could try to avoid tax by transferring value in a form that is not a strictly a loan.
The Chancellor suspects, probably with justification, that taxes are being avoided by participators repaying a loan shortly before the nine-month repayment date, only to take out a new loan shortly afterwards. In addition to the 30-day rule, tax relief for a loan repayment will be denied if an amount of ?15,000 or more is outstanding and at the time of repayment there are arrangements, or an intention, to redraw any amount either through a loan, advance or an extraction of value from the company. The Chancellor has been very vocal in his intention to pursue large corporations and wealthy individuals who do not pay their fair share of tax. The vast majority of UK companies are “close companies” and HMRC consider the potential tax loss to be significant. No content on this site may be copied, reproduced, syndicated, distributed, modified, reverse-engineered or passed through any server or function without express permission from Carraghyn Limited via the Contact Us page on this site (see left). But in practice, you calculate the tax on your overdrawn loan on your Company Tax Return and add it to the Corporation Tax that’s due. You don’t need to include any information about this loan on your Company Tax Return. Assuming these funds do not represent the repayment of an outstanding loan to the business, and if the amount is over and above the director’s salary, expenses and dividend payments, this money is classed as a Director’s Loan and must be recorded in the Director’s Loan Account (DLA). If you are still unclear after that it could be worth speaking to a small business accountant before proceeding. Director’s loans that are more than ?5,000 bring much more significant tax implications, largely due to HMRC’s efforts to prevent tax avoidance. This tax burden is designed to ensure director’s loans are not used to avoid taxation on money taken out of a business, and as such the company can reclaim this corporation tax after the loan has been fully repaid.
Again, this is to prevent director’s loans being used for tax avoidance, and this corporation tax can be reclaimed by the company after both loans have been fully repaid.


A good team of small business accountants can help you take the right steps when borrowing money from your company - visit our team of accountants in London or give us a call to discuss your requirements. When funding is hard to come by capital requirements are often funded by loans from company directors, which are then repaid as the new company begins to generate revenue.
Known as a “section 455” charge, the company incurs corporation tax at a rate of 25% of the outstanding loan. HMRC is concerned that there have been instances where companies have avoided a tax charge by making loans to partnerships or trusts where a participator is either a partner or a trustee. For example a company and a participator might form a partnership and the company leave its share of the profits in that partnership. To deal with this the new rules will mean that if a loan repayment of more than ?5,000 is repaid to the close company and another loan, or transfer of value, is made within 30 days, the original tax charge will apply.
Owners and directors of close companies should review their loan arrangements, and any other transfers of value, and if necessary seek professional advice on the potential impact of these rule changes. You need to include information about this loan on your Company Tax Return but you will not need to pay any tax on the loan. Each of them has an overdrawn director's loan account with little possibility of repaying the amounts. I have a Limited Company originally setup with 2 directors each owning 50% of the shares.
The company and the director must also comply with stringent HM Revenue and Customs rules when recording and repaying director’s loans. This can be a substantial charge, but if the loan is subsequently repaid, the company is entitled to a full refund. In effect the loan goes indirectly to the participator, and the company avoids paying the corporation tax that would have been due had the loan passed directly to the individual. If the participator subsequently draws down funds from the partnership, against the company’s undrawn profits, it would not technically be a company loan. The individual sums may be small but the large number of small companies in the UK makes this a high priority for HMRC. Evidence will be required to show that the loan actually was repaid (details of cheque or bank transfer) and that there was not just a book transaction.




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