Once you have completed your limited company formation you may be considering a directors loan.
Director’s loans can occur as both official loans from the company or simply as an overpayment of amounts due to you. How ever the loan has originated there are tax consequences for both the company and you as the director. Our contractor accountants here at Genie Accountancy are more than happy to discuss
Personal Tax Considerations
With effect from 6 April 2014, any loan that exceeds £10,000 at any point during the year must be declared on your P11d for each tax year in which the loan is outstanding. (For tax years prior to 6th April 2014, the amount was set at £5,000).
You will incur a benefit in kind if the loan is a “beneficial loan” i.e the interest charged on the loan is below the official interest rate as set by HMRC. The benefit in kind value is equivalent to the official rate of interest on the loan less any interest paid by the employee (or director) to the company during the year.
Any tax payable by you on the loan will be at your marginal rate. Your company will also need to pay Class 1a National Insurance on any such benefit.
Personal Tax Example
The director of ABC Limited takes a director’s loan from his company of £20,000 on 6th April 2014. During the year to 5th April 2015, he also withdraws funds in excess of those due to him as salary, expenses or dividends. These excess funds amount to £5,000. On the 6th November 2014, he repays £10,000. The loan has been classed as a beneficial loan as no interest has been paid on the outstanding balance.
The benefit in kind is calculated as follows:-
| Loan outstanding at 6th April 2014 | £20,000 |
| Other funds advanced during the year | £5,000 |
| Loan outstanding at 6th April 2015 | £15,000 |
| Maximum loan outstanding during the period | £25,000 |
| Average loan outstanding during the period | £20,000 |
| Official rate of interest | 3.25% |
| Benefit in kind value (average loan X interest rate) | £650 |
The benefit in kind would be declared on your P11d and additional tax of £130 (20% of BIK) in personal tax will be due if you are a basic rate taxpayer. If your marginal rate of tax is 40% your additional benefit in kind tax charge will be £260.
Any loan that is outstanding at the Company’s year end is subject to an additional Corporation tax charge under S455 of the Corporation Tax Act 2010.
The surcharge value is calculated as 25% of the outstanding loan at the year end and is payable with the Corporation tax at the normal due date. However, if all or part of the loan is repaid within 9 months of the year end the surcharge is reduced by 25% of the repaid amount. If the whole loan is repaid with the 9 months there will be no surcharge.
HMRC will repay the surcharge but only at a point when the loan has been cleared. Any monies paid under the surcharge will be repaid to the company nine months after the end of the accounting period in which the loan is repaid. This can impact cash flow severely.
Company tax example:
A loan of £50,000 is taken on 6th June 2014 by the director and is still outstanding at the company’s year end of 31ST October 2014. The loan is repaid on 25th August 2015.
The 25% surcharge will apply and will equate to £12,500 and will be payable by the company along with their Corporation tax due at the normal due date of 31 July 2015. Interest will be charged by HMRC if the tax or surcharge is paid late.
The director repays the loan in full before the end of the next financial year (31 October 2015) and so the company is entitled to reclaim the surcharge of £12,500.A letter will need to be sent to HMRC detailing the repayment of the director’s loan and requesting the surcharge to be refunded. HMRC may ask to see evidence that the loan has been refunded.
If HMRC are happy to repay the surcharge they will do this by 31 July 2016, the date when the Corporation tax for the period is due.
Surcharges paid under S455 are costly, especially given the time delay between payment and refund.
Bed and Breakfasting
HMRC can classify a series of loans as one single loan for P11d and Section 455 purposes. If you take a loan, repay it on 30 September (for example) to avoid a S455 charge and then take out a new loan for the same amount on 1 October, HMRC would deem there to have been no repayment and as such he S455 charge would apply.
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