There are tax consequences for both companies and directors relating to the issue of director’s loans. We will examine below some of the implications if a company facilitates loans to a director. A director’s loan comprises not just an actual loan, but can also include other payments made by the company for the personal benefit of a director such as personal expenses paid for on a company credit card. These amounts are usually posted to a director’s loan account (DLA).
When and if your company has to tell HMRC about a director’s loan, depends on when the loan is repaid. Any company loans to directors outstanding at the end of the company’s Corporation Tax accounting period, have to be disclosed in the accounts and on the company tax return. There is an additional Corporation Tax (CT) bill of 32.5% of the outstanding amount (prior to April 2016 this rate was 25%) where the DLA remains outstanding 9 months after the year end. There are also special rules to stop director’s repaying a loan and then taking a new loan out in quick succession (known as bed & breakfasting).
In most cases this extra 32.5% (25% if the loan was made before 6 April 2016) CT is not a permanent loss of revenue for the company as a claim can be made to have this CT refunded when the loan is repaid, written off or released. However, any interest paid by the company is non-refundable. To be effective, the claim to have the tax refunded needs to be made within 4 years after the end of the year in which the Director’s loan was repaid.
If the loan exceeds £10,000 at any time in the year, then the company must treat the loan as a benefit in kind and deduct Class 1 National Insurance. There is no benefit in kind to pay, if the director pays a market rate of interest due on the loan.
Please call if you need advice regarding these issues for your company.