Reply to: Withdrawing money lent TO limited

[ASB]

IR35 of itself isn't significant. However if you are IR35 caught the only profit you will have available is 5% of turn over.

What is significant is that you have 65k of loan in the company which the company can pay you out of taxed income - with no further tax on your part.

Now, you can also withdraw taxed income - up to the point of about 40k (your basic rate allowance) with no further tax to pay. IF you don't use this allowance you lose it. So look at 2 possibility's:-

1) You make a profit of 70k. You pay 14k CT and transfer 56k to the balance sheet.

So now you have:-

Directors loan -65,000
Current year profit 56,000

Shareholders funds -9,000

So, you make a loan repayment of 56,000. Good, no more tax to pay

Now you have

Directors loan -9,000
Current year profit 0
Shareholders funds -9,000

This appears the same - well strictly only "sort of".

Next year your trading position is exactly the same

directors loan -9,000
profit 56,000
funds 47,000

So, you decide to pay the loan off AND pay a dividend of 47,000. This dividend takes you into HRtax so you have to pay approx 2,000 of it to HMRC.

Now start from Y1 again:-

Directors loan -65,000
Current year profit 56,000
Shareholders funds -9,000

So, you pay 40k dividend and 16k loan repayment. No more tax to pay. You now have:-

Directors loan -49,000
Current year profit 0
Shareholders funds -49,000

Year 2 come along. You repeat. So you pay 40k in dividends (no more tax) and 16k in loan. You are 2k better off and still have 36k of loan in the company going forward.

Of course whether or not this is effective depends upon your exact position - and that of the company since dividends can only be paid from profits. It could be that your balance sheet is such that dividends cannot be paid until the loan is repaid anyway - though that would depends on a number of factors.

The key thing is to extract taxed money in such a way as you use your tax allowances and only then should you start making loan repayments.

Also don't pay no salary. Ensure you are paying a salary equal to your tax free code in order to get a years pension credit and also use rather than lose your tax free allowance (ie don't pay 1200 more in tax than you need to).

So I'll come back to:-

If I were in the OP's position I would:-

1) Take dividends to ensure that the basic rate threshold was used by the recipients [without repaying the loan]
2) Use any funds that were available beyond this as loan repayments (thus drawing taxed income beyond this with no further personal income tax).

[malvolio]

I.e. if I am not taking a salary, does it matter if I am in or out of IR35?

Wrong way round. If you are caught by IR35 (and most people aren't, if they only knew it), 95% of whatever your gross income is is liable to taxation under PAYE/NICs, whether or not you pay yourself a salary.

[sal626]

Thanks for the replies all…meeting my accountant next week to discuss further, but had a 2 min chat with him.

From what I understand, the limited can invoice client, and money received will be “turnover”.
I have to pay CT on the gross profit,
and after that I can withdraw the money without any more tax due.

What I also need to clarify next week, is that if I take no salary (but company pays CT and I take loan repayments)…is IR35 still an issue? I.e. if I am not taking a salary, does it matter if I am in or out of IR35?

[ASB]

No, but what I mean is that the company can not pay it out of IR35-caught money, because that is deemed to be salary.

Of course it can. There is nothing that says itm ust be paid to the employee, only that that it is treated in a specific way for PAYE purposes.

Granted it's difficult to conceive of any situation where doing anything other than paying it to the employee is sensible.

[Tarquin Farquhar]

The Director's Loan amouint is not income...

No, but what I mean is that the company can not pay it out of IR35-caught money, because that is deemed to be salary.

[malvolio]

The Director's Loan amouint is not income...

[Tarquin Farquhar]

PMFJI but isn't IR35 an issue in that, if the new contracting income stream is inside IR35, 95% of it will be deemed salary and will be due PAYE and NICs?

Yes, from a company point of view it can pay any money that it has to the OP as repayment on the loan. Yes, from a personal point of view the OP can receive repayment on the loan without tax being due. But wouldn't it be true that the IR35-caught income would not be treated as being the company's money to do what it wants with, it would be treated as deemed salary?

[ASB]

Still disagree. The £65k "liability" in the Director's loan account is not income.

Agree, but it needs net income (of which taxation on the company is a consequence) to be able to repay the capital sum. i.e. capital repayments of debt are not (chargeable) expenses. To try and exemplify what I think your argument is.

I incorporate a new company and contribute (say) 100 in shareholders funds.

It just so happens I lend new co 100k. Newco bills 100k. It's only "expense" is the loan repayment of 100k. So it pays me back. Clearly this shouldn't be chargeable as a deductible expense. If it were I'd never have to pay a penny in tax again (either personal or corporate).

[JonSmile]

the other thing to consider is the shareholders - is the other director a shareholder / have access to the company bank account
do you trust them?

are you happy that you are working and generating income for the company and come divi time, they may get a wedge..

[malvolio]

Still disagree. The £65k "liability" in the Director's loan account is not income. However I shall digest your argument and consider things. I will say that advice from my accountant, under almost identical circumstances, was that as long as money in equals money out, there is no tax due in any direction.

As for "not wrong", that was about the BN66 case and I stand by it.

[ASB]

I think one of us has missed something. I read it that he has put £65k of his own taxed income in to the company as a director's loan (a real one, not the petty cash route many people use to take money out!). Hence taking it back is simply repaying a loan. He has no tax liability, unless interest is charged since the money has already had tax paid on it, and the £65k is not turnover so has no CT liability.

Agreed. But the point is that at this point the BS looks something like this:-

Shareholder funds bf 1000
Amount falling due 65000 (the loan given by OP)
Net shareholders funds -64000 (and there are some technical things that ought to be have done about ongoing support)

Now, the company wanders along and happens to make not trading profit (after tax) so the balance sheet doesn't change. But let's say there is a final profit of say 2000.

So we would have:-

P+L Y2.

Turnover 20,000
Cost of sales 18,000
Gross profit 2,000
Taxation 400
Transfer to reserves 1,600

BS is now showing -62,400 net shareholders funds [can't be bothered to exemplify, you have the accountancy background not me]

Assume that is the current position, but OP next year makes a 65k profit, The P+L looks like this:-

Turnover 100,000
Cost of sales 35,000
GP 65,000
Taxation 13,650
NP 51,350
Divs 0
Tfr to BS 51,350

The BS then looks like

b/f

Net shareholders funds -62,400 (inc 65k loan)
From reserves 51,350 (this years net P+L)
Shareholders funds -11050

(of course at this point the capital item is now 65k- 51350 = whatever)

So if I have read your post correctly and understand the point you make you have got it wrong. The fact is that the loan is a capital liability and capital is only built up by transfer of retained profits after tax to the BS (i.e the trading position after taxation generates potential capital retention).

The taxation consequence is, as I was trying to say, neutral. The OP can take loan repayment (from post tax corporate income with no personal taxation consequence) OR dividends (which may have a personal taxation consequence). In any event it needs post tax profit to repay the loan.

If I were in the OP's position I would:-

1) Take dividends to ensure that the basic rate threshold was used by the recipients [without repaying the loan]
2) Use any funds that were available beyond this as loan repayments (thus drawing taxed income beyond this with no further personal income tax).

You posted earlier 'ain't been wrong yet'; that was as inaccurate when you posted it as it was before.

[malvolio]

I think one of us has missed something. I read it that he has put £65k of his own taxed income in to the company as a director's loan (a real one, not the petty cash route many people use to take money out!). Hence taking it back is simply repaying a loan. He has no tax liability, unless interest is charged since the money has already had tax paid on it, and the £65k is not turnover so has no CT liability.

[ASB]

Before I started contracting, I had a limited co. with another director. We were developing software for various clients, and had 20 odd staff based offshore. In 2005 a client went bust owing us £65K. To meet our commitments I got a remortgage on a property and loaned £65K to the company. We wound down the limited to a great extent (no more offshore team) but it is still operational, with revenues of about £3-4K revenue per month. All accounts etc are up to date.

I started contracting in 2005 but didn’t use the limited company.

I was thinking of using the limited company for contracting now. I would take a salary, and start paying myself back some of the money I had loaned the company.

I can’t think of any issues with this (am planning to discuss with accountant tomorrow anyway), but would appreciate any obvious flaws with the plan…. Will IR35 be an issue?

Basically you seem to be in a position where you have lent a company 65k. That company has a "chequered" trading position but is in one of two state:-

- The losses have been charged back to CT and adjusted
- It has trading losses it can carry forward.

Overall it also has a spot of bother with the balance sheet - it owes you 65k plus any interest you choose to charge (largely pointless since it is just income to you anyway).

The company is merrily trading away producing some revenue on it's own account (and thus slowly improving the position). It's obviously not affluent enough to repay the capital debt to you.

The capital injection you made is presumably not a debenture or anything - just shareholders funds (not that it would actually make any difference anyway).

The underlying question might be "can I profit from this from a tax point of view". You might be thinking that you could put the first 65k of billings through the company and repay the loan from that.

What you can do is put 65k of billings, have 65k profit (no exes for ease) pay 13.x k CT and repay 52k of the capital of the debt to yourself. (So at least you can get the funds out without it being income but CT is still paid). Thus the company can trade its way and repay your debt without the debt repayment being taxed income (though the point is moot since the overall difference is nil).

In terms of IR35 these arrangement will make no difference. But that doesn't mean IR35 isn't an indirect problem. If you are inside IR35 then the company ain't going to be making much profit and therefore isn't going to have the shareholders funds to repay.

[thunderlizard]

That looks sensible to me.
IR35 shouldn't be (more of) a problem (than it is anyway) because it only affects income from each IR35-inside contract, and doesn't put other income streams at risk.

[sal626]

Thanks Mal,
Thats what I intend, repay from limited the original loan I made in 2005.