Tax on directors' loan will now cost 32.5 per cent
QUESTION: I run my own small business and I am considering buying my daughter a house in Belfast where she is starting university. Rather than take additional dividends or salary I am thinking about borrowing the money from my own company. What are the tax implications?
ANSWER: A director's loan account is simply an account in the balance sheet that summarises the transactions between a company director and the company. A director may receive a loan advance from his own company provided that it is not in financial difficulty and subject to adherence to the provisions of the company's articles of association and the 2006 Companies Act.
It is relatively common for a director to borrow money from his company but this incurs a temporary tax charge as HMRC will consider that you have received the benefit of an interest free director's loan from the company.
If the overdrawn loan is not repaid within nine months of the end of your corporation tax period – the company will be charged on the balance of the outstanding loan. The purpose of this additional tax is to discourage the misuse of company funds.
Where you are unable to repay the director's loan account, then additional corporation tax must be paid to HMRC. This is calculated and included in the corporation tax return. If the director's loan account is paid down in a future corporation tax period – then the corporation tax charge is reversed and repaid or offset against the corporation tax liability in the future period. The tax is due under s.455 CTA 2010.
The rate of tax charged on loans to directors increased from 25 per cent to 32.5 per cent from April 2016 in line with the increase in dividend rates on this date.
There is also an income tax implication on most loans from a company to a director as the loan will create a benefit in kind charge and a P11D reporting obligation for the director. If the overdrawn (debit balance) on a director's current account with the company exceeds £10,000 it is treated as an employment-related loan. A taxable benefit will arise on an employment-related loan when the employee does not pay interest to the employer at HMRC's official rate of interest.
HMRC instructs its staff to examine directors' private expenditure during the course of an enquiry into a company's books and records. In most cases the company will be expected to produce a transaction history of any director's loan or current account.
HMRC introduced new anti-avoidance measures in March 2013 to stop bed and breakfasting situations where a loan is repaid to the company and then a similar sum advanced shortly after the effect being that there is no actual repayment.
It is important two directors (typically spouses) agree between them to allow an offset so that one's loan credit is set against the other's loan debit: HMRC will not accept the offset unless there is evidence to prove the intention to create a joint loan account. Therefore it is vital that the company and the relevant directors agree the treatment of aggregating or offsetting loan accounts at the time that the loans are made or when two are to be offset and record this in a board minute at the time.
There are a number of complicated tax implications in relation to the company writing off or releasing directors from repaying loans they have borrowed from the company. These should be considered carefully before any action is taken on these balances.
:: Malachy McLernon (firstname.lastname@example.org) is a director of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.