Reply to: Sizeable loan or take the hit on dividend?

[d000hg]

Makes us look fairly good. But then there's NI to consider as well as everything else. Is there even a name for the total tax paid in a country divided by GDP, or some other rough guide to total tax?

[SueEllen]

In which case see my original point - we're far more able to reduce how much we pay than the permies

Can you name some nations in the developed world which pay substantially less tax than us? I've heard it claimed the US has low tax but I imagine in reality it's low in one area but higher in another... or forgets sales tax and state taxes, etc.

This list is interesting

[d000hg]

Tax everyone pays is outrageous, I dont discriminate.

In which case see my original point - we're far more able to reduce how much we pay than the permies

Can you name some nations in the developed world which pay substantially less tax than us? I've heard it claimed the US has low tax but I imagine in reality it's low in one area but higher in another... or forgets sales tax and state taxes, etc.

[northernladuk]

Tax everyone pays is outrageous, I dont discriminate. 20% should be the top rate, anything else is a disincentive and theft.

That's right.. That is why we can't afford to run the country even though we have higher rates. A top rate of 20% really would leave us in a great position

[escapeUK]

Outrageous being substantially less than a permie would pay on the same income?

Tax everyone pays is outrageous, I dont discriminate. 20% should be the top rate, anything else is a disincentive and theft.

[Wanderer]

For the sake of it, a 1 minute discussion with the other shareholder, and the 5 minutes it'll take to write up the minutes, I think I will probably do this

Me too! I'm just looking for someone to come up with the right wording for the resolution and minutes of the meeting because I'm not entirely sure how to answer the questions as they seem to be geared more towards protecting shareholders from the actions of the directors which isn't such a great concern to a director of a close company.

This may sound like paranoid ramblings and perhaps no one is really going to care at the end of it all but I did a google and a few accountants out there seem to think that there needs to be some sort of paperwork for loans of >£10k due to CA s197. I can't find any specific wording for the meeting minutes though, so let's do the world a favour and make some up that we can share.


The Companies Act section 197 requires that a resolution approving a transaction must be passed and the following must be disclosed —


(a)the nature of the transaction,

This could be something like "A loan to the director to be repaid to the company on demand OR on dd/mm/yyyy OR before the end of 9 months after the company year end". There is talk in HMRC's manuals that a fixed term loan is harder to challenge than a director who uses the company bank account as their personal one so maybe a fixed repayment date is the better option here. Or perhaps it could be as simple as "this transaction is a loan to the director, Joe Bloggs".


(b)the amount of the loan and the purpose for which it is required, and

The amount of the loan shall be £xxxx pounds for the purpose of ????. I'm stuck on this point. You can't put "to pay for the director's coke and hooker habit" but at the same time what's the difference what the loan is for so long as it has shareholder approval? I guess you could put in something like "as an advance against future salary/dividends" but that would imply that the money would eventually be paid out as salary or dividend and this may not be the case and it may limit future options like the company making an investment or a capital distribution.

What ever it is we really need this to be as vague as is legally acceptable. Can we just say "as a general purpose loan" here. Anyone?


(c)the extent of the company's liability under any transaction connected with the loan.

Not really sure what they are driving at there? Is this to cover the situation where the director uses the company funds as security against a debt owed to a third party rather than taking a cash loan? How do we cover this off in the meeting minutes?

[d000hg]

Outrageous being substantially less than a permie would pay on the same income?

[escapeUK]

If tax hadnt become such an outrageous percentage there would be no need to avoid it. So meh.

[d000hg]

And we're offended HMRC think 1-man companies are used to avoid tax!

Not saying there is anything dodgy, but when we are able to implement such elaborate measures it's no wonder it looks that way sometimes.

[ChimpMaster]

I thought that might be the case.

The reason I ask is because there is apparently a risk that HMRC could seek to re-classify the loans as salary. I was thinking that if the director could produce minutes of a shareholder's meeting approving the loans as required under the CA (s197) then HMRC are going to have a much tougher fight on their hands...

For the sake of it, a 1 minute discussion with the other shareholder, and the 5 minutes it'll take to write up the minutes, I think I will probably do this

[Wanderer]

Technically speaking, a special resolution must be passed for loans in excess of £10,000. However, in practice this rarely happens for one man (plus wife) corporations such as your own.

I thought that might be the case.

The reason I ask is because there is apparently a risk that HMRC could seek to re-classify the loans as salary. I was thinking that if the director could produce minutes of a shareholder's meeting approving the loans as required under the CA (s197) then HMRC are going to have a much tougher fight on their hands...

[Martin at NixonWilliams]

Martin, thanks for contributing. My year end is April 2013 - if I take the money out now, are you saying that I have until Jan 2014 to repay (+ interest) before I incur s455 tax?

Jan 2014 would most likely be OK, because there's no way I can see this contract running until then - and it is my last contract for sure, for a long while anyway... so I will liquidate and repay the loan before then.

That is correct, you could repay the loan any time up to 31st January 14 assuming the period spans May 12 to April 13. If the April yearend is an extended yearend earlier dates may apply. As Wanderer says, it is important that this deadline is not missed as the repercussions could be costly!

Technically speaking, a special resolution must be passed for loans in excess of £10,000. However, in practice this rarely happens for one man (plus wife) corporations such as your own.

Finally, note that the liquidator may want to see the loan physically repaid to the company before the remaining funds are distributed to shareholders. It is unlikely that this will be imposed if there are no other creditors waiting to be paid as a result of you having the loan but it is something to be aware of.

I hope this helps.

Martin

[Wanderer]

Martin, thanks for contributing. My year end is April 2013 - if I take the money out now, are you saying that I have until Jan 2014 to repay (+ interest) before I incur s455 tax?

Yes, pretty much but find out the exact dates because 9 months after the company year end is the drop dead date, miss it by a day and you will have to pay 25% of the loan to HMRC. It's refundable but not for quite some time so don't get it wrong or you will pay da price.

Have a read of what HMRC says about directors loans which explains the different scenarios pretty well. That link talks about BIK quite a lot, but remember that if you pay interest at the offical rate for beneficial loans (currently 4%) then there is no BIK and that interest becomes company profit which can be paid back to you as paye/dividend/capital-distribution or whatever.

More detailed and probably not relevant to you if you stay within the rules is the tool kit explaining what they look for when they investigate directors loans. As far as I can see you are ok if you follow the rules but I'm not an accountant and you have to be 100% sure on this one so get advice.

One possible gotcha not mentioned yet is that loans of > £10,000 require shareholder approval by ordinary resolution at a general meeting or in writing/email. See Section 197 of the Companies Act 2006.

From what I can understand the law requires the memorandum or meeting minutes to contain:

• a statement of approval for the loan to be made
• the amount of the loan
• the nature and purpose of the loan
• the extent of any liability under any transaction connected with the loan.

I'm sure our helpful accountant friends on this forum will know all about this and one of them will be able to come up with a template you could use.

[ChimpMaster]

As you need the money before April 2013, you could shorten your yearend to the month immediately before the month you intend to take the loan. This will defer the date in which the loan must be repaid in order to avoid S455 tax.

For example - If you were to shorten your yearend to 31st December 2012 with the intention of taking the loan in January 2013, the loan could be repaid any time up to 30th September 2014 without paying S455 tax.

If you leave your yearend date as it is and take the loan in this period, the date in which the loan must be repaid to avoid S455 tax will be 31st January 2014 (9 months from your current yearend).

I am unsure how this affects you given your future intentions to liquidate etc., but I hope you find this useful.

Martin

Martin, thanks for contributing. My year end is April 2013 - if I take the money out now, are you saying that I have until Jan 2014 to repay (+ interest) before I incur s455 tax?

Jan 2014 would most likely be OK, because there's no way I can see this contract running until then - and it is my last contract for sure, for a long while anyway... so I will liquidate and repay the loan before then.

[Martin at NixonWilliams]

Damnit I'd forgotten about S.419/S.455. If I borrow the money it will certainly be before April 2013 (my end of year). I'll have to work out how S.419/S.455 affects this.

As you need the money before April 2013, you could shorten your yearend to the month immediately before the month you intend to take the loan. This will defer the date in which the loan must be repaid in order to avoid S455 tax.

For example - If you were to shorten your yearend to 31st December 2012 with the intention of taking the loan in January 2013, the loan could be repaid any time up to 30th September 2014 without paying S455 tax.

If you leave your yearend date as it is and take the loan in this period, the date in which the loan must be repaid to avoid S455 tax will be 31st January 2014 (9 months from your current yearend).

I am unsure how this affects you given your future intentions to liquidate etc., but I hope you find this useful.

Martin