Directors Loan - Have I got this right?
Directors Loan - Have I got this right?
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Extra 300 Driver

Original Poster:

5,282 posts

276 months

Wednesday 27th March 2019
quotequote all
Let's say I want to borrow £100k from my business, if, 9 months after the end of the reporting period, I still owe £50k. what is my personal tax exposure? Is it 40% of the outstanding amount, or 40% of the interest of the outstanding amount?

anonymous-user

84 months

Wednesday 27th March 2019
quotequote all
There are potential implications for you and the company

Start here

https://www.gov.uk/directors-loans/you-owe-your-co...

Extra 300 Driver

Original Poster:

5,282 posts

276 months

Wednesday 27th March 2019
quotequote all
Thanks, I have read through that. From a personal perspective, if I pay the HMRC interest rate then it wont be treated as BIK?

Eric Mc

125,762 posts

295 months

Wednesday 27th March 2019
quotequote all
If you pay interest on the loan to the company at or above the rate set by HMRC, there is no taxable benefit in kind arising.
Of course, the interest you pay to the company is treated as taxable income in the hands of the company, so the company will pay Corporation Tax on that interest.

If the balance at the end of the financial year is not cleared within 9 months of the end of the financial year and it exceeds £10,000, the COMPANY will be liable to a special Section 455 "Penalty" Corporation Tax charge calculated at 32.5% of the outstanding balance. In your scenario of a balance of £50,000 on the loan, this would give rise to a Corporation Tax charge of £16,250. This is in addition to any normal Corporation Tax liability arising from the profits of the company.

S.455 tax is a temporary situation. Once the outstanding balance is repaid in full by the director, any S.455 tax paid to HMRC will be refunded. However, getting the tax refunded is a long drawn out process and can take up to two years of writing to HMRC with schedules showing how and when the loan was repaid plus other documentary evidence that HMRC might wish to see - such as bank statements.

The moral of the story is to ensure that all such loans are either extinguished on or before the financial year end date of the company or at least 9 months after that date.

There is a statutory obligation under both tax rules and company law to provide details in the notes to the accounts that such a loan exists - so conveniently forgetting to mention that the "Sundry Debtor" showing in the balance sheet actually relates to a loan to a director or some other participator or connected person is illegal.

https://www.rossmartin.co.uk/companies/checklists/...

Extra 300 Driver

Original Poster:

5,282 posts

276 months

Wednesday 27th March 2019
quotequote all
Eric Mc said:
If you pay interest on the loan to the company at or above the rate set by HMRC, there is no taxable benefit in kind arising.
Of course, the interest you pay to the company is treated as taxable income in the hands of the company, so the company will pay Corporation Tax on that interest.

If the balance at the end of the financial year is not cleared within 9 months of the end of the financial year and it exceeds £10,000, the COMPANY will be liable to a special Section 455 "Penalty" Corporation Tax charge calculated at 32.5% of the outstanding balance. In your scenario of a balance of £50,000 on the loan, this would give rise to a Corporation Tax charge of £16,250. This is in addition to any normal Corporation Tax liability arising from the profits of the company.

S.455 tax is a temporary situation. Once the outstanding balance is repaid in full by the director, any S.455 tax paid to HMRC will be refunded. However, getting the tax refunded is a long drawn out process and can take up to two years of writing to HMRC with schedules showing how and when the loan was repaid plus other documentary evidence that HMRC might wish to see - such as bank statements.

The moral of the story is to ensure that all such loans are either extinguished on or before the financial year end date of the company or at least 9 months after that date.

There is a statutory obligation under both tax rules and company law to provide details in the notes to the accounts that such a loan exists - so conveniently forgetting to mention that the "Sundry Debtor" showing in the balance sheet actually relates to a loan to a director or some other participator or connected person is illegal.

https://www.rossmartin.co.uk/companies/checklists/...
Thanks Eric, thats great.