The rising costs of taking loans from your company
The tax implications of taking a director’s loan.
HMRC introduced provisions a number of years ago which targeted company directors who took loans from their personal companies. Prior to these provisions they could effectively avoid income tax and national insurance charges by paying themselves through loans or advances instead of taking dividends or salary.
The tax charge introduced was known originally as ‘section 419’ and later as ‘section 455’. The tax charge was set at 25% of the loan to ‘participators’.
Where the loan is not repaid within nine months of the company’s accounting period, the rate of tax charged on loans to participators and other arrangements will increase to 32.5%. The Chancellor has specifically chosen this percentage charge to align it to the dividend upper rate.
Effect of the increase Remember that the s.455 ‘charge’ is not actually a corporation tax charge similar to that on year end profits. The company pays it with regard to the amount of the outstanding loan but if the loan is repaid within the allotted time then the amount is repaid. The new tax on dividends may also impact on a director’s decision whether to repay their loans by way of distributions.
Points to remember:
It is often assumed that a director is also a participator – not necessarily so. There are some exemptions for a director’s loan where that person does not have a material interest in the company. The full exemption details are available here.
The s.455 tax is due nine months and one day after the end of the accounting period in which the liability arises. This means that if the accounts are prepared, and the CT 600 produced, towards the end of the nine month filing deadline there will be a much higher cash outflow due to HMRC – made up of the normal corporation tax charge and also the s.455 charge. This might put a strain on the finances of the company.
If you’re a shareholder and director and you owe your company more than £10,000 (£5,000 in 2013 to 2014) at any time in the year, there will be a taxable benefit for the director and a P11d will be need to be filed. This will also mean additional entries on the director’s personal self assessment return.
When the loan is repaid either in full or in part, the s.455 tax is fully or proportionally repayable. The bad news is that this is not due back until after nine months and one day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released. You won’t be repaid before this. This means that the charge paid to the government may be out of the company's working capital for many months.
For accounting periods which straddle 6 April 2016 different rates will be applied to separate loans made or benefits conferred before, and on or after, 6 April 2016.
Reclaiming the charge is not always straightforward. If the company is reclaiming within two years of the end of the accounting period when the loan was taken out, the details can be included on form CT600A when they prepare a company tax return for that accounting period or amend it online.
Form 2LP can also be used with the company tax return instead if either:
the tax return is for a different accounting period than the one when the loan was taken out
the company is amending the tax return in writing.
If the company is reclaiming two years or more after the end of the accounting period when the loan was taken out, you will need to fill in form L2P and either include it with your latest company tax return or post it separately.
Questions on the subject asked by ACCA’s members:
Why not repay the loan just before the deadline, then immediately re-take the loan shortly into the new accounting period? Where a loan is repaid and then a similar sum advanced shortly after, there are measures that apply from 2013 that mean that the repayment may be matched to the later advance, the effect being that there is no actual repayment
If there are two directors with one loan in credit and the other in debit can we amalgamate the two to avoid a charge? Two directors (possibly spouses) may agree between them to allow an offset so that one's loan credit is set against the other's loan debit. However, HMRC may not accept the offset unless there is evidence to prove the intention to create a joint loan account. Typical forms of evidence to use would be formal agreements and also board meeting minutes.
Note that any agreements and minutes should be made at the time of the decision to offset and should not be back dated.
In addition, if one individual has two loan accounts that are accounted for separately for reporting purposes and one is overdrawn HMRC may try to resist aggregating them for tax and so will not treat the two as one net balance.
Summary Due to the increased cost of borrowing and the interaction with the new dividends tax, companies and their participators must plan ahead so that they are aware of the tax liabilities and when they need to be paid.