DIRECTORS LOAN
Provided a director sticks to the rules they may borrow money interest free from their limited company. This action may generate tax bills for both director and company, provided it is executed properly, this can be avoided, how useful.
When a director borrows from their company, there are two potential tax charges. A comparatively small one for its director, and although short – lived, a much greater one for their company, however, the rules which determine when each charge applies are very different. Since 6 April 2014, the most a director can borrow interest free from their company without it being considered as a taxable benefit is £10,000 (this was previously £5,000) so provided the borrowing is kept below the limit at all times there will not be any tax payable by them. The position of the company is a bit more complex……
COMPANY TAX
The company must pay tax equal to 25% (32.5% for advances after 5 April 2016) of the amount owed to it by each director on the last day of its financial year, unless ….. the director repays what they owe within the next nine months Example below
At end of Limited Company A’s financial year 31 March 2016, on that date its only director owes the company £9,500. On 20 September the director uses their overdraft to repay their loan to company A. On 21 October 2016 the director then borrows £9,500 from company A and repays their overdraft. By using this arrangement the company side-steps any tax charges, and because the amount borrowed is less than the £10,000 it is also tax free to the director.
There used to be a method which enabled the director to work around the 9 month rule and thus avoid the tax charge as follows:
At the end of the company’s financial year (31 March 2012), if the director shareholder owed say £12,000 to the company the potential tax charge of £3,000 could be avoided by lending the director a further £12,000 this was done by 30 September 2012 and used to repay the initial loan. By 30 September 2013 the trigger point for tax on the replacement loan, the company could have repeated the process again to avoid the subsequent tax charge. This method, christened bed & breakfasting, would have meant the company could dodge the tax charge indefinitely.
Predictably, the government introduced anti-avoidance rules to put a stop to the ‘bed and breakfasting’ of directors’ loans. These new rules have applied since 20 March 2013. Now if a company makes a loan in the 30 days before or after a director repays a previous loan, the repayment is ignored for the purpose of working out if a tax charge arises
We have considerable experience in all areas of taxation and businesss services, including providing a very cost-effective payroll bureau service.
Contact us on 01925 413210 – or e-mail info@warringtonaccountants.co.uk