Director's Loan from Company Rules?
Discussion
Hi all, just wanted to double check my understanding of the rules on loans from a company to a director...
Let's say Bob 100% owns and is the sole director of ABC Limited, a personal service company through which he contracts his services to his clients.
ABC Limited's year end is 31 May.
As I understand it, Bob could take a loan of up to £10,000 from his company on 1 June 2020 (first day of ABC Limited's financial 20/21 year) and, as long as:
1) Bob repaid the loan in full by 9 months and a day after the end of the 20/21 year end, so 1 March 2022; and
2) Bob paid the company the HMRC's official interest rate on the loan (expected to be 2.25%) until it's repaid in full; then
...there would be no tax to be paid by Bob on the loan.
ABC Limited would have to pay tax on the interest income from Bob, but that would be the Corporation Tax rate applied on the interest, which would be 19% of 2.25%, which gives an effective rate of less than 0.5% p.a. of the loan balance.
Do I have that right for the tax payments required?
Also, what are the reporting requirements, presumably the company would include the director's loan balance on its balance sheet at the year end.
Would Bob have to declare the loan on his P11D or Personal Tax Return?
Thanks in advance for any help offered.
Let's say Bob 100% owns and is the sole director of ABC Limited, a personal service company through which he contracts his services to his clients.
ABC Limited's year end is 31 May.
As I understand it, Bob could take a loan of up to £10,000 from his company on 1 June 2020 (first day of ABC Limited's financial 20/21 year) and, as long as:
1) Bob repaid the loan in full by 9 months and a day after the end of the 20/21 year end, so 1 March 2022; and
2) Bob paid the company the HMRC's official interest rate on the loan (expected to be 2.25%) until it's repaid in full; then
...there would be no tax to be paid by Bob on the loan.
ABC Limited would have to pay tax on the interest income from Bob, but that would be the Corporation Tax rate applied on the interest, which would be 19% of 2.25%, which gives an effective rate of less than 0.5% p.a. of the loan balance.
Do I have that right for the tax payments required?
Also, what are the reporting requirements, presumably the company would include the director's loan balance on its balance sheet at the year end.
Would Bob have to declare the loan on his P11D or Personal Tax Return?
Thanks in advance for any help offered.
Talk to an accountant, you've got all sorts of complications here that probably don't apply.
Read this then anything specific get professional advice.
https://www.gov.uk/directors-loans
Read this then anything specific get professional advice.
https://www.gov.uk/directors-loans
There are separate Income Tax Benefit in Kind rules and penalty Corpotration Tax rules.
As mentioned above, if the loan enever exceeded £10,000, even if the company does not charge the director a commercial rate of interest on the loan, this does not have to be reported to HMRC under the BIK disclosure rules and no tax is due. The "9 month rule" is nothing to do with the BIK treatment.
However, there are other factors regarding loans to directors outside of the BIK situation and these relate to the basic legality of "overdrawn directors loan accounts" under the provisions of the 2006 Companies Act and Corporation Tax. In particular, the penalty Corporation Tax charge of 32.5% levied on balances outstanding for longer than 9 months after the financial year end of the company. This is usually referred to as a Section 455 charge.
https://www.gov.uk/directors-loans/you-owe-your-co...
As mentioned above, if the loan enever exceeded £10,000, even if the company does not charge the director a commercial rate of interest on the loan, this does not have to be reported to HMRC under the BIK disclosure rules and no tax is due. The "9 month rule" is nothing to do with the BIK treatment.
However, there are other factors regarding loans to directors outside of the BIK situation and these relate to the basic legality of "overdrawn directors loan accounts" under the provisions of the 2006 Companies Act and Corporation Tax. In particular, the penalty Corporation Tax charge of 32.5% levied on balances outstanding for longer than 9 months after the financial year end of the company. This is usually referred to as a Section 455 charge.
https://www.gov.uk/directors-loans/you-owe-your-co...
Eric Mc said:
There are separate Income Tax Benefit in Kind rules and penalty Corpotration Tax rules.
As mentioned above, if the loan enever exceeded £10,000, even if the company does not charge the director a commercial rate of interest on the loan, this does not have to be reported to HMRC under the BIK disclosure rules and no tax is due. The "9 month rule" is nothing to do with the BIK treatment.
However, there are other factors regarding loans to directors outside of the BIK situation and these relate to the basic legality of "overdrawn directors loan accounts" under the provisions of the 2006 Companies Act and Corporation Tax. In particular, the penalty Corporation Tax charge of 32.5% levied on balances outstanding for longer than 9 months after the financial year end of the company. This is usually referred to as a Section 455 charge.
https://www.gov.uk/directors-loans/you-owe-your-co...
Thanks Eric, so to check my understanding, if the loan isAs mentioned above, if the loan enever exceeded £10,000, even if the company does not charge the director a commercial rate of interest on the loan, this does not have to be reported to HMRC under the BIK disclosure rules and no tax is due. The "9 month rule" is nothing to do with the BIK treatment.
However, there are other factors regarding loans to directors outside of the BIK situation and these relate to the basic legality of "overdrawn directors loan accounts" under the provisions of the 2006 Companies Act and Corporation Tax. In particular, the penalty Corporation Tax charge of 32.5% levied on balances outstanding for longer than 9 months after the financial year end of the company. This is usually referred to as a Section 455 charge.
https://www.gov.uk/directors-loans/you-owe-your-co...
1) paid within 9 months of year end; and
2) is under £10k for the duration
Then no tax is payable by the director or the company?
youngsyr said:
Thanks Eric, so to check my understanding, if the loan is
1) paid within 9 months of year end; and
2) is under £10k for the duration
Then no tax is payable by the director or the company?
Correct. However, check out the Companies Act disclosure requirements too.1) paid within 9 months of year end; and
2) is under £10k for the duration
Then no tax is payable by the director or the company?
And also, if HMRC has a hint that there might have been on overdrawn loan account during the year, they can ask for the individual transaction details (although they hardly ever do).
If and when Making Tax Digital ever comes into effect for Corporation Tax, these are the types of detailed transactions HMRC can't wait to get their beady eyes on.
Eric Mc said:
youngsyr said:
Thanks Eric, so to check my understanding, if the loan is
1) paid within 9 months of year end; and
2) is under £10k for the duration
Then no tax is payable by the director or the company?
Correct. However, check out the Companies Act disclosure requirements too.1) paid within 9 months of year end; and
2) is under £10k for the duration
Then no tax is payable by the director or the company?
And also, if HMRC has a hint that there might have been on overdrawn loan account during the year, they can ask for the individual transaction details (although they hardly ever do).
If and when Making Tax Digital ever comes into effect for Corporation Tax, these are the types of detailed transactions HMRC can't wait to get their beady eyes on.
Do the company disclosures apply to micro company accounts too?
ETA: stopped being lazy and did my own research, the answer is yes micro entity accounts must disclose the directors loan.
"CA 2006, s. 413 requires details of directors’ loan accounts where they were in debit at any time during the year, though neither require disclosure of the name (s) of the director(s)."
Edited by youngsyr on Sunday 12th April 16:56
youngsyr said:
Do the company disclosures apply to micro company accounts too?
ETA: stopped being lazy and did my own research, the answer is yes micro entity accounts must disclose the directors loan.
"CA 2006, s. 413 requires details of directors’ loan accounts where they were in debit at any time during the year, though neither require disclosure of the name (s) of the director(s)."
it's all out there if you care to look it up ETA: stopped being lazy and did my own research, the answer is yes micro entity accounts must disclose the directors loan.
"CA 2006, s. 413 requires details of directors’ loan accounts where they were in debit at any time during the year, though neither require disclosure of the name (s) of the director(s)."
Edited by youngsyr on Sunday 12th April 16:56
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