TT186: Overdrawn Director’s Loan Accounts
In March 2013 HMRC announced new measures which extend the section 455 tax charge to deter tax avoidance using close company (directors) loans. These measures are intended counter arrangements where a close company makes loan advances, and in particular where “bed and breakfasting” is used: i.e. where a loan is repaid shortly before the 9 month period elapses and a new loan advance is made shortly after.
The tightening up of the bed and breakfasting rules is an area where a number of companies and their directors will need to review their existing policies to ensure they do not incur significant tax liabilities.
The basic legislation is as follows:
Company tax charge on outstanding loans to participators: s 455 CTA 2010
When a director (or any other participator in a close company) is made a loan which is left outstanding for more than 9 months after the company’s accounting period end, the company will be required to pay tax under s.455 CTA 2010. S.455 tax is payable at 25% of the outstanding loan balance.
Tax is due 9 months and one day after the end of the accounting period in which the liability arises.
When the loan is repaid in full or in part s.455 tax is fully or proportionally repayable 9 months and one day after the end of the accounting period in which the repayment is made.
Where a loan is repaid and then a similar sum advanced shortly after, HMRC may ignore the repayment and treat the loan as if it has been outstanding for the whole period (i.e. the bed and breakfasting rules).
Taxable benefit: if the loan is interest-free and exceeds £5,000
If the overdrawn (debit balance) on a director’s current account with the company exceeds £5,000 (£10,000 from 6th April 2014) it is treated as an employment-related loan. A taxable benefit will arise on an employment-related loan when the employee does not pay interest to the employer at HMRC’s official rate of interest. The cash benefit is the difference between interest calculated at HMRC’s official rate and the interest paid (if any has been charged). The taxable benefit of interest calculated is required to be reported on form P11D.
Where the company has overdrawn loan accounts then advanced planning is required to ensure that wherever possible these balances are cleared before the company’s year end, and if this is not possible then at least within 9 months of the company’s year end.
It is also very important to have good quality management accounting information so the exact balance on any director’s loan account is known and so that the above planning can be carried out.
Repayment can be made via a variety of methods including the voting of dividends, salary payments, the offset of loan accounts in other companies and cash repayments. In addition further options may be available with some advance planning.
If further loans or drawings are to be made after the repayment then it will be important to ensure this does not fall foul of the bed and breakfasting regulations. Again if advanced planning is carried out it should be possible to ensure no tax liability is triggered.
We would recommend that every effort is made to avoid overdrawn loan accounts and that regular dividends or salary are voted/paid during the year rather than resolving these matters at a later date. This will also minimise exposure to any benefit in kind charge.
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