Reply to: Directors Loans

[Nixon Williams]

Alan have you had clients that have had action taken against them by HMRC for these sort of transactions? I fully agree with you that yours is the less risk approach. It would be interesting to know how this is implemented in practice by HMRC. It's only relatively recently that the low beneficial loan interests rates have made this sort of arrangement worthwhile.

Luckily, we manage to keep most of our clients outside of this minefield, however we have had a few clients where the S455 tax has had to be paid etc.

[minstrel]

I fully agree with Alan here that you need to be very careful to ensure you don't have any loan outstanding at year end to avoid the S455 charge

I also agree that it is prudent to leave a gap and make the loans for different amounts.

I do sometimes wonder if there are any examples of HMRC taking action over this strategy and what the risk is.

If the loan doesn't show on balance sheet at the end of year it won't be reported to HMRC, so there would be nothing to prompt an investigation. Although I accept this could come up in a detailed investigation where HMRC ask you to account for every bank transaction.

Also, my understanding is the S455 charge is largely to reduce the tax advantage a Director could make by using the loan as income, not paying any tax and then defaulting on the loan repayment. I imagine HMRC could come after company and force it to recover loan, but it's a lot easier for HMRC just to discourage these arrangements by whacking on a 25% S455 charge and getting you to "pay it forward". They'll then give it back if when Director pays it back.

Alan have you had clients that have had action taken against them by HMRC for these sort of transactions? I fully agree with you that yours is the less risk approach. It would be interesting to know how this is implemented in practice by HMRC. It's only relatively recently that the low beneficial loan interests rates have made this sort of arrangement worthwhile.

[Nixon Williams]

It looks even more attractive if you are paying off a high interest debt, like a credit card but don't be tempted because you will just max out your credit cards again and have no money to pay your company back and this will land you in a lot of trouble. Remember that from the company's point of view, this is a LOAN that MUST be repaid or you will get stung by the Corporation Tax implications of overdrawn directors' loan accounts. DON'T do it if there is any risk that you will default on it. To my mind, the only safe option is using the director's loan to reduce the balance on a fully flexible mortgage where you can borrow the money back at any time.

I would advise caution here, any loan that is outstanding at the company’s yearend is subject to a corporation tax surcharge under section 455 of the Corporation Tax Act 2010 (section 455 CTA2010).

The surcharge value is calculated as 25% of the outstanding loan at the yearend and is payable with the corporation tax at the normal due date.

However, if part or all of the loan is repaid within 9 months of the yearend then the surcharge charged is reduced by 25% of the repaid amount and as such, if the whole loan is repaid within 9 months of the yearend, there will be no surcharge applied.

The surcharge is repayable by HMRC but only at a point when the director’s loan has been cleared. In this case, any monies paid under the surcharge will be repaid to the company 9 months after the end of the accounting period in which the loan is repaid.

You also need to be wary of so called 'bed & breakfasting', basically speaking, if you take out a loan, repay it on 30th November (for example) to avoid the section 455 charge then take out a new loan for the same amount on 1st December, HMRC would deem there to have been no repayment and as such the section 455 tax would be due.

If you wish to take a new loan out shortly after repaying one you should ensure it is for a different amount, a different purpose and leave as big a gap as possible between the loans. This bed and breakfasting is again something we would advise against.

Alan

[minstrel]

That means that the net cost of the directors loan is 0.8% APR if you are a lower rate tax payer. If you are a higher rate tax payer then the net cost of the directors loan is 2.4% APR because you have to pay higher rate tax of 25% on the dividends.

Net cost will be 1.6% (4% @ 40%). The effective rate of interest will be 2.4%.

[Wanderer]

...therefore its only feasible if the offset mortgage is higher than HMRC's current approved rate of 4%?

Not quite.

Let's say you can take a director's loan from your company and pay 4% interest to the company. The company then pays this money back to yourself as a dividend, minus 20% Corporation Tax. That means that the net cost of the directors loan is 0.8% APR if you are a lower rate tax payer. If you are a higher rate tax payer then the net cost of the directors loan is 2.4% APR because you have to pay higher rate tax of 25% on the dividends.

It looks even more attractive if you are paying off a high interest debt, like a credit card but don't be tempted because you will just max out your credit cards again and have no money to pay your company back and this will land you in a lot of trouble. Remember that from the company's point of view, this is a LOAN that MUST be repaid or you will get stung by the Corporation Tax implications of overdrawn directors' loan accounts. DON'T do it if there is any risk that you will default on it. To my mind, the only safe option is using the director's loan to reduce the balance on a fully flexible mortgage where you can borrow the money back at any time.

[minstrel]

...therefore its only feasible if the offset mortgage is higher than HMRC's current approved rate of 4%?

No.

It depends on your individual circumstances, but in general if the interest rate on your mortgage is higher than the savings rate your company can get then it is worth doing.

[jags274]

Offset mortgages

I don't think either accountant is correct.

Yes it's legal - providing you deal with it correctly and pay back in full before year end.

If you pay interest at the HMRC approved rate (currently 4%), then there is no need to declare on P11D.

If you don't pay interest then you do have to declare it on P11D and pay tax and NI as it's treated as a benefit in kind.

Whether or not it's worthwhile depends on your situation.

If you earn 2.8% net interest personally and then pay your company 4% you will be 2.8 - 4 = -1.2% at this stage. The 4% interest will be additional income for the company which would incur 20% CT leaving 3.2% which could then be distributed as dividends so you could end up -1.2% + 3.2% = 2% better off.

However, you can easily lose most of the benefit if you are high rate tax payer. Say you earn 2.8% gross interest and you are taxed at 40%, you would have 1.68% net interest personally. Pay your company 4% and you would be -2.32%. The 4% interest earned by company would be 3.2% after CT. If this is distributed and subject to higher rate tax on dividend you would have a net dividend of 2.4%. -2.32% + 2.4% = 0.08%.

By my calculations it's only worth it if you can earn a higher personal interest rate or you use the funds to offset a mortgage effectively making it tax free interest.

...therefore its only feasible if the offset mortgage is higher than HMRC's current approved rate of 4%?

[GECK0]

Don't worry too much but do tell your accountant what you've done and they can sort it all out properly. For background read this topic which has some really good advice from one of the helpful accountants here.

If you took < £5,000 then you can just pay it back and there are no consequences.

If the loan is a penny more than £5,000 at any time during the tax year then you either have to pay tax on the benefit in kind (BIK) if it was an interest free loan. If you pay the loan back with interest at the HMRC approved interest rate then there is no BIK. The interest becomes company income which the company pays CT on and can then distribute back to you as salary/dividends so if you paid your company £1000 interest then you could potentially get £800 of that back after Corp Tax was paid.

There are a couple of dates to be very aware of, in particular the loan has to be repaid before 9 months after the last day of your company tax year. If your loan is still outstanding then your company gets hit with a 25% charge on the loan amount. See the guidance from HMRC on Corporation Tax implications of overdrawn directors' loan accounts. And no, you can't just pay the loan back and then take out another one the next day (bed and breakfasting) to get around this restriction.

Thanks so much for your help and advice.

I will read the various links that you have provided, and talk with my accountant.

It should be OK - since I can repay it with interest if required.

Thanks again!

[Wanderer]

All I have been doing is taking the money out of my company bank account and putting it in a web saver account to earn some interest.
I cant undo what Ive done - but I need to kn ow the best way forward.
I'll repay any money with interest to cover my company tax but is there anything else I should do?

Don't worry too much but do tell your accountant what you've done and they can sort it all out properly. For background read this topic which has some really good advice from one of the helpful accountants here.

If you took < £5,000 then you can just pay it back and there are no consequences.

If the loan is a penny more than £5,000 at any time during the tax year then you either have to pay tax on the benefit in kind (BIK) if it was an interest free loan. If you pay the loan back with interest at the HMRC approved interest rate then there is no BIK. The interest becomes company income which the company pays CT on and can then distribute back to you as salary/dividends so if you paid your company £1000 interest then you could potentially get £800 of that back after Corp Tax was paid.

There are a couple of dates to be very aware of, in particular the loan has to be repaid before 9 months after the last day of your company tax year. If your loan is still outstanding then your company gets hit with a 25% charge on the loan amount. See the guidance from HMRC on Corporation Tax implications of overdrawn directors' loan accounts. And no, you can't just pay the loan back and then take out another one the next day (bed and breakfasting) to get around this restriction.

[northernladuk]

Well thanks for the advice :-(

I have just appointed an accountant last week. I was hoping for some advice here....

You got the best advice possible for your situation. We can't look at your books to see what to do, see how much interest you made so we know what to claim and so on. We don't generally care so better to let someone else look at it that is paid to care.

[GECK0]

Speak to your accountant.

What is the point of having an accountant if you don't use them for accountancy questions?

Well thanks for the advice :-(

I have just appointed an accountant last week. I was hoping for some advice here....

[minstrel]

I'll repay any money with interest to cover my company tax but is there anything else I should do?

Speak to your accountant.

What is the point of having an accountant if you don't use them for accountancy questions?

[GECK0]

Remember dividends can only be taken from PROFIT. If you have been giving yourself money that should have been put aside for tax you could be in a lot of trouble. Also if you have been just giving yourself the money with the idea of giving it back by the end of the year so your books would have read what they did all along you are also in a lot of trouble.

Get an accountant.

All I have been doing is taking the money out of my company bank account and putting it in a web saver account to earn some interest.

I will repay this back to my company - but I dont want to end up in a lot of trouble.

I have an accountant - but so far I have been recording everything myself, and I have not discussed this with them.

So I cant undo what Ive done - but I need to kn ow the best way forward.

I'll repay any money with interest to cover my company tax but is there anything else I should do?

[rambaugh]

You would need a solicitor to help with this at cost I take it? This hasn't been tested either? Isn't writing yourself a deed of trust to then give you the money? Isn't there a conflict of interest?

I remember you speaking about this awhile ago and was interested to know how it would work. Surely if it was this easy it would a) have been common knowledge now b) been abused to high heaven by now?

One would probably need to make provision for funds to defend yourself in case HMRC investigated. Obviously using funds in this way offers a lot of reward (if you have a off-set mortgage) but also increases your risk of falling foul of HMRC.

Just an idea, but suppose an even higher risk option is to invest in an off-shore company/bank bond in a currency where you can find superior interest rates. There are a couple of places where you can AAA status countries where its possible to fetch upto 8% interest in blue chip company bonds.

[northernladuk]

A deed of trust is the way forward. Deposit the money into your personal bank account. Complete a deed of trust stating that you are doing so on behalf of the company. When you withdraw the money from the personal bank account, repay it, including interest, to the company.

Ideally deposit enough money that no tax is deducted at source otherwise it complicates your CT return somewhat.

Everyone's a winner.

PUMA

You would need a solicitor to help with this at cost I take it? This hasn't been tested either? Isn't writing yourself a deed of trust to then give you the money? Isn't there a conflict of interest?

I remember you speaking about this awhile ago and was interested to know how it would work. Surely if it was this easy it would a) have been common knowledge now b) been abused to high heaven by now?