Tax on Directors loans – Watch out for anti-avoidance and don’t forget the P11d benefit
In owner managed businesses the shareholder directors frequently draw money from their companies, not as salaries to which PAYE and NI deductions are applied, but on account of dividends to be paid to them at some future date. These withdrawals are usually charged to the director’s loan account with the company, and this can often result in the loan account becoming overdrawn, until a dividend is credited to the account to repay the loan.
If the business does not perform as well as expected, there may not be sufficient “distributable profits” from which to pay the expected dividend, and the director’s loan may remain outstanding for longer than expected. This can have two tax consequences, one for the company and its corporation tax, and one for the director’s personal tax.
For the company an additional amount of corporation tax (often referred to as “section 455 tax”) is payable if the loan is not repaid within nine months of the accounting year end. The amount payable is 32.5% of the balance owed to the company at the accounting year end. The good news is that this is only a temporary tax, because once the loan is repaid (more than nine months after the year end), the tax is then repaid to the company (but not until nine months after the end of the accounting year in which the loan is repaid).
The loan can of course be repaid by the director other than by way of a dividend, and the director could pay personal monies into the company to achieve the same result. But be wary of the anti-avoidance rules which can apply where a loan is repaid from personal funds, and a further loan (or loans) totalling £5,000 or more is made within a period starting 30 days before, and ending 30 days after, the loan repayment date. In this event the loan repayment amounts (up to the amount of the new loan) are ignored in deciding whether a loan has been repaid within nine months of the year end.
A personal tax liability will arise if a loan of more than £10,000 is outstanding, to a director, for more than one complete tax month (ie. starting on the 6th day of each month) and he or she pays no interest on the loan (or pays interest as less than the “official rate”, currently 2.5%). A taxable benefit in kind arises, at 2.5% per annum, normally on the average balance owed to the company, but this can be calculated on a daily basis if either HMRC or the taxpayer chooses this alternative. This personal liability arises irrespective of whether the loan is repaid within nine months of the year end or not.
It is important, therefore, to be aware of the balance outstanding on a director’s loan account at any given point in time, and to ensure that repayments are carefully planned and monitored, to minimise tax liabilities.
If you have any queries regarding this area of compliance please speak to a member of the Barnes Roffe team.
Blog written by: Andrew Kent
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