Directors’ loan tax and how to prevent it

Company director-shareholders often borrow money from their own companies. One risk attached to taking out a loan from your own business is that it can trigger a sizeable tax bill. Director-shareholders are regarded as ‘participators’ by HMRC, who are known for adding vast amounts of tax to these loan arrangements.

HMRC rules say that companies must pay 32.5% of the debt if it is not repaid by the end of the accounting period. You won’t be able to repay the loan by borrowing more from the company due to HMRC’s anti-avoidance legislation. This is known as ‘bed & breakfasting’ and rarely goes unnoticed or unpenalised by the tax authorities.

Repaying a loan

You could repay the loan by getting a dividend or bonus from the company, although this may not be an option depending on the current state of the business’ finances. It’s also essential to ensure your company can meet liabilities such as corporation tax before you take out the loan.

Any loan you take out which is still outstanding on the balance sheet date must be disclosed on the company’s accounts and on its tax return.

Timing a loan

If you do decide to borrow money from your company, you should time it appropriately so you have as much time as possible before the balance sheet date. If you borrow money on the first day of the company year, you will essentially have 21 months to pay it back, but you only have nine months if you take out the loan on the last day of your company year. In some circumstances, it may be wise to source cash with a loan and repay it with dividends later.

It’s important to remember that the company is liable for tax on a loan, with the individual being responsible for the tax on dividends.

For expert advice regarding company loans, contact ADM on 01242 679767 or email andrew@admaccountancy.co.uk

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The information contained in this website is for general information purposes only. The information is provided by ADM Accountancy Services Ltd and while we endeavour to keep the information up to date and correct...
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