Directors loan questions

[Freakuk]

Hi folks,

Couple of simple questions I hope.

I'm considering taking a directors loan, I think I read that there was a limit of £20K and it has to be repaid within 9 months and 1 day or by your companies financial YE whichever comes first - Is that correct?

Can you make repayments monthly or is it best to repay in a single deposit, any pros/cons either personally or for the business to consider?

Anything else I am missing?

[StevieBee]

Freakuk said:

Hi folks,

Couple of simple questions I hope.

I'm considering taking a directors loan, I think I read that there was a limit of £20K and it has to be repaid within 9 months and 1 day or by your companies financial YE whichever comes first - Is that correct?

Can you make repayments monthly or is it best to repay in a single deposit, any pros/cons either personally or for the business to consider?

Anything else I am missing?

Yep - you're correct.

You can repay monthly or whenever. Best to pay it back as and when you can. If for whatever reason you get to 9 months and can't settle the company will be clobbered for tax on the amount outstanding (although it gets this back when settled).

And don't forget that £10k of the £20k you borrow, BIK will apply.

[Eric Mc]

The situation with Directors, Loan Accounts is that, if at all possible, avoid using your own limited company as a personal bank account.

There are two danger areas associated with such loans -

Section 455 of the Corporation Taxes Act which slaps SERIOUSLY punitive Corporation Tax charges (35%) on directors' loan account balances left unpaid 9 months after the financial year end of the company

Taxable Benefits in Kind (BIK) charged on low or no interest charges on loan balances exceeding £10,000. The BIK can be avoided if the company charges the borrower (i.e. the director) a commercial rate of interest. However, any interest charged to the borrower becomes income as far as the company is concerned and will be chargeable for Corporation Tax purposes

There are other non-tax considerations as well - such as the required Company Law disclosure notes that should be shown in the company's statutory accounts and therefore filed at Companies House..

[lizardbrain]

is that a blessing to use it as a bank account up to 10k for 9 months?

[Eric Mc]

lizardbrain said:

is that a blessing to use it as a bank account up to 10k for 9 months?

That depends.

If there is a Benefit in Kind charge, that must be accounted for under the PAYE system more or less in real time - so unless the company is charging the director a commercial level of interest on the loan, the director will start paying additional PAYE on their salary fairly quickly.

The 9 month window is only there in respect of the 35% S.455 Penalty Tax Charge.

HMRC is fully entitled to ask to see evidence that such a balance was genuinely cleared or reduced in that 9 month window.

And the declaration requirements in the notes to the company accounts still remain.

The best policy is to avoid such a scenario in the first place.

[lizardbrain]

If bik only applies over 1ok, there doesn t seem to be a clear obligation to charge interest under 10k

Or any downside to using it as a bank account up to this amount?

[mattybrown]

There is no limit on Directors loans as long as the shareholders agree the loan. Need to make sure the paperwork is done, you can't just do an iou and empty the bank account.

Edited by mattybrown on Saturday 24th January 16:11

[Eric Mc]

With one man companies there are no other shareholders, The single director/shareholder can more less do whatever they want - as long as it’s legal or they prepared to disclose everything correctly and pay the penalties and taxes arising.

One other area that has to be taken into account is a director pulling money out of the company when it has other creditors- such as unpaid suppliers, taxes or lenders who legally may take priority.
If that is the case, the director could be open to allegations of fraud,

[Freakuk]

Thanks all,

It’s just me, no other shareholders.

Basically it’s a short term loan for a couple of months, my YE in July so it will be paid back by then, probably within a month or two.

I could use my bank, but why pay interest?

[Eric Mc]

Freakuk said:

Thanks all,

It s just me, no other shareholders.

Basically it s a short term loan for a couple of months, my YE in July so it will be paid back by then, probably within a month or two.

I could use my bank, but why pay interest?

Will it be for more than £10,000?

[Terminator X]

Perhaps O/T but can you loan money between different companies and is it treated like a "directors loan". Same time to pay it back etc?

TX.

[Eric Mc]

Terminator X said:

Perhaps O/T but can you loan money between different companies and is it treated like a "directors loan". Same time to pay it back etc?

TX.

Inter company loans generally do not have the same repercussions regarding Section 455 Corporation Tax or PAYE Benefit in Kind rules.

HOWEVER, lending between "connected" companies (i.e. companies that share common directors or other individuals in a position of control) must be disclosed in the notes to the statutory accounts with a clear and truthful description of the levels of lending and the terms and conditions associated with any such loans.

[Terminator X]

Thanks Eric.

TX.

[Freakuk]

Eric Mc said:

Will it be for more than £10,000?

No, maybe 10K or just below.

[Eric Mc]

Freakuk said:

Eric Mc said:

Will it be for more than £10,000?

No, maybe 10K or just below.

Well, if you manage to keep the loan under £10,000, that will remove the PAYE benefit in Kind issues. Once you go over £10,000, you have a legal obligation to start charging PAYE under the "beneficial loan" rules.

All the other factors mentioned above will stay in play no matter what the balance is.