Lessons from loans

In many close companies (essentially owner managed companies) director shareholders have a current account with the company. This is often used to credit salary and dividends and to charge personal bills and draw down funds for personal use. In some cases this account becomes overdrawn during the accounting period and this is treated as an advance or a loan. When this occurs there are a number of potential tax implications to be aware of for both the individual director shareholder as well as the company.

The company position

When such advances or loans are made to a shareholder, the company must make a payment to HMRC if the advance made in the accounting period is not repaid within nine months of the end of the accounting period. The amount of the corporation tax, often referred to as s455 tax, is 25% of the loan. If the loan is repaid at a later time (ie after this date) the company will need to pay over the tax and wait some time for it to be repaid. This is because the tax is not repayable until nine months after the end of the accounting period in which the monies are repaid. A loan or advance to an ‘associate’ of a shareholder, such as a relative, is also included for this purpose as if the loan had been made to the shareholder.

HMRC changes

HMRC have become concerned about the way in which some close companies have been arranging these loans in a way that seeks to avoid the tax. Whilst not necessarily accepting that all such arrangements work, HMRC want to ensure that some of the arrangements are definitely caught by the tax charge and therefore intend to make some changes. These proposals are included in the current Finance Bill which will become law in the summer but which have effect from 20 March 2013.

The first change is to put beyond doubt that the charge applies where loans or advances are made via intermediaries such as Limited Liability Partnerships, partnerships and trusts. The charge will apply where at least one participator in the close company is a member, partner or trustee.

The second change will impose the 25% charge on certain arrangements where value is extracted from a close company and an untaxed benefit is conferred on an individual participator (or associate) other than by way of a loan or advance.

The third change is to prevent the practise of avoiding the payment of the tax charge by repaying the loan before the tax is due (nine months after the end of the accounting period) and then effectively withdrawing the same money shortly after. This change may also prevent refunds of the 25% tax already paid where loans are redrawn shortly after.

The long established procedure of declaring a dividend or granting of a bonus which is equal to the amount outstanding will still remove the tax liability.

It is essential however that the amounts are cleared properly and, in the case of a dividend, in compliance with company law. Please contact us for assistance to help you to ensure that s455 tax is not payable.

Tax position of the individual

The position of the individual should also be considered as in making the loan or advance. Where the individual is both a director and shareholder and is provided with a cheap or interest free loan, the company has to report a benefit in kind for the notional interest on the loan at 4% per annum on the form P11D unless the balance of the loan is no more than £5,000 throughout the tax year. The exemption only applies if the total balance, at any point in the tax year, does not exceed the limit of £5,000 and includes the total of low cost, or interest free, loans or notional loans arising from the provision of employment-related securities.

From 6 April 2014 where the total outstanding balances on all such loans do not exceed £10,000 at any time in the tax year there will not be a tax charge and employers will no longer be required to report the benefit to HMRC.

If you require any assistance in determining whether these types of benefit are reportable or other P11D assistance please do contact us.