Reply to: Director's Loan - how much can you borrow?

[ASB]

Go careful with reducing payments on account though if you know they will be too low - HMRC do have the power to add on penalties of up to 100% of the amount due, and I've heard of them doing so in an extreme case.

It is the reasonable care regime. So you need to have reasonable evidence. Ggs stated case is that she is going to borrow to keep under it.

if it turns out she can't then self declaration of this to hmrc unprompted via an amendment in a contemporaneous manner may be enoughto alleviate any penalty.

But yes, if they are taking the mick the potential is there for hmit to give them a unpleasant day.

pushing up towards limits always makes things more risky. I guess this is a strong reason why your profession generally doesnt encourage it (sensibly). With this sort of pushing one needs to be right on top of things to stay on the right side.

[Clare@InTouch]

Go careful with reducing payments on account though if you know they will be too low - HMRC do have the power to add on penalties of up to 100% of the amount due, and I've heard of them doing so in an extreme case.

[DirtyDog]

I was of the belief that you could always appeal the payment on account figures. The penalty for being wrong to do it ending up being the interest payment that would be required.

Yep - and if they get it wrong and you didn't owe the money, they pay you interest on it.

I'd just rather have it in my account (possibly earning less interest) than in theirs - at least I know I can get it back easily out of my account!

[ASB]

Who can?

But yes, you're right. I probably can get by on £4k until 6 April & I may just as well take the hit otherwise I'm always going to be playing catch up. The thing I REALLY want to avoid is paying on account. My accountant tells me I can avoid this so long as my liability doesnt exceed £1k, which it won't by going 4k into the higher tax band.

I was of the belief that you could always appeal the payment on account figures. The penalty for being wrong to do it ending up being the interest payment that would be required.

I dont really see a huge problem with the concept of the payment on account. You are paying for half of the estimate for the current tax year 3 quarters of the way through it.

not too unreasonable in most cases and more charitable than those earning salaries which take them beyond the basic rate.

[Gittins Gal]

So you are up to the max this year so have to take the loan to tide you over. So next year you know you can't survive on the max AND you have to pay a loan back? Great plan that.

No.

Read my last post.

[TheCyclingProgrammer]

Who can?

But yes, you're right. I probably can get by on £4k until 6 April & I may just as well take the hit otherwise I'm always going to be playing catch up. The thing I REALLY want to avoid is paying on account. My accountant tells me I can avoid this so long as my liability doesnt exceed £1k, which it won't by going 4k into the higher tax band.

You can apply to reduce your payments on account if you think it will be a one off but by the sounds of things you will need to regularly pay enough dividends to take you into the higher rate.

Paying on account only really bites the first time around. Going forwards it should have less impact.

[northernladuk]

So you are up to the max this year so have to take the loan to tide you over. So next year you know you can't survive on the max AND you have to pay a loan back? Great plan that.

[Wanderer]

Ok, it's £9k, I know. My question is this, though. If I borrow £8k then pay it back within the same tax year (had to do some juggling a few weeks back) does that mean I can now only borrow £1k this years or has the balance been reset now I've paid it back?

You can borrow up to £5K with no implications for BIK. If you take more than that you have to pay interest to the company on the loan, (currently 4% which then becomes company profit that you get back minus tax) so your net interest rate is probably going to be about 1%. Alternatively you can take the loan interest free and pay tax on the benefit in kind of the loan.

You also have to make sure you avoid the S455 charge and new rules in the 2013 budget make it difficult to do this if you take a loan of £15k or more so don't do that.

[Gittins Gal]

With all due respect, if you can't survive on the maximum funds withdrawn at the basic rate.

Who can?

But yes, you're right. I probably can get by on £4k until 6 April & I may just as well take the hit otherwise I'm always going to be playing catch up. The thing I REALLY want to avoid is paying on account. My accountant tells me I can avoid this so long as my liability doesnt exceed £1k, which it won't by going 4k into the higher tax band.

[TheCyclingProgrammer]

That said, I'm now up to the higher rate threshold & I want another loan to get me through to April 6th so I don't have to pay higher rate tax..

With all due respect, if you can't survive on the maximum funds withdrawn at the basic rate, then you either need to work on managing your budget better or face up to the fact that you're going to have to take extra dividends and take the higher tax hit.

Taking a loan to "tide you over" isn't going to help you in the long run. It's just delaying the inevitable. You'll pay it back at the start of the new tax year by declaring a dividend and then what? Come the end of that tax year you'll find yourself short again (probably even sooner than this time around). It's going to catch up with you eventually.

But to reiterate my earlier advice. If your DLA balance never exceeds £5k then AFAIK there are no BIK issues to worry about. As long as any outstanding balance at the end of your company's tax year is paid with 9 months after that point, there are no CT issues to worry about either.

[Gittins Gal]

But if the OP isn't aware of all the rules, which is clearly the case, they need to be very clean. Again what you say is correct to people that can manage it properly. The OP needs to understand that there can be problems. They could easily fall foul of the 30 day rule within a company year and again, the end of an investigation may say bed and breakfasting doesn't apply but the aim is to avoid and investigation, not push the rules so hard HMRC come looking and you end up having to defend yourself.

The OP makes no mention of how long this loan situation has been going on so for all we know she could be in a world of trouble already.

I needed £5k as I was going to by 5 grands worth of Royal Mail shares (we all know what happened there) deal them on the same day, bank the profit and repay the loan. I didn't want to take this as a dividend - it was just a way of juggling money. It's repaid now and I haven't borrowed any more.

That said, I'm now up to the higher rate threshold & I want another loan to get me through to April 6th so I don't have to pay higher rate tax.

Thanks for the answers.

[TheCyclingProgrammer]

I'm just stating the facts and answering the question the OP has asked. It's not my responsibility to make sure people know what they are doing, it's theirs.

I thought my first post made pretty clear all of the things that need to be considered when taking a directors loan, including the 30 day rule.

Their accountant should have explained all of this to them in the first place.

[northernladuk]

I don't disagree with your advice but taking out and repaying multiple loans within a single accounting period isn't going to cause a problem. Bed and breakfasting doesn't come into the equation unless it's being used to avoid a CT charge.

I do agree that people shouldn't be messing around with directors loans unless they are fully aware of the rules and consequences if they mess it up, and OP clearly isn't.

But if the OP isn't aware of all the rules, which is clearly the case, they need to be very clean. Again what you say is correct to people that can manage it properly. The OP needs to understand that there can be problems. They could easily fall foul of the 30 day rule within a company year and again, the end of an investigation may say bed and breakfasting doesn't apply but the aim is to avoid and investigation, not push the rules so hard HMRC come looking and you end up having to defend yourself.

The OP makes no mention of how long this loan situation has been going on so for all we know she could be in a world of trouble already.

30-day rule

Where a participator makes a repayment of more than £5,000 to the company and within 30 days a new loan is taken out, the reduction that is normally allowed in the 25% tax charge calculation will be restricted by the lower of the amount repaid and the new amount borrowed. For example, if a participator has a loan of £12,000 and a repayment of £10,000 is made shortly after the end of the accounting period then previously a 25% tax charge would be applied to the remaining balance of £2,000.

However, if within 30 days of the repayment, a further loan of £8,000 is taken out then under the new rules, a 25% tax charge will become due on the balance of £10,000.

[TheCyclingProgrammer]

Not quite hence the need so speak to your accountant.

I don't disagree with your advice but taking out and repaying multiple loans within a single accounting period isn't going to cause a problem. Bed and breakfasting doesn't come into the equation unless it's being used to avoid a CT charge.

I do agree that people shouldn't be messing around with directors loans unless they are fully aware of the rules and consequences if they mess it up, and OP clearly isn't.

[TheCyclingProgrammer]

To answer your question, it's based on your company's financial year not the tax year. It doesn't matter how much you borrow or pay back during the course of this period (subject to what I outlined above), what matters is what's left outstanding at the end accounting period, as it relates to the CT charge.

As I mentioned before, the current limit is £5k not £9k so you should be paying either interest or NIC as the loan is above his amount. I'm not sure if this applies to the whole loan or just the amount over £5k, I suspect it's this former.

I'm going to go all NLUK and say you should speak to your accountant ASAP to make sure you sort out the BIK issue (easily rectified but make sure you do). If you intend to pay it all back before the company year ends (or within 9 months after) you need not worry about he CT charge.