There are a number of reasons why you (or a close family member) might take a loan from your company. Whether you need to bridge a personal cash shortfall, fund a house deposit, or purchase a car, you must ensure this cash advance has been planned accordingly, otherwise you could end up facing a larger than expected tax bill.
All loans made to directors that are outstanding at the end of the company’s accounting period must be disclosed in the accounts and on the company’s tax return.
Where a director has an overdrawn loan account in the company, and this sum is not repaid within nine months following the end of its accounting period, there is a liability to a S455 tax charge.
This tax charge is payable together with any corporation tax which may be payable by the company. Prior to the 5th of April 2016 the rate of the S455 tax charge was 25% of the sum overdrawn. With effect from the 6th of April 2016 this has increased to 3 2.5% of the sum overdrawn, to fall in line with the new dividend tax regime.
The S455 tax charge is repayable to the company once the overdrawn loan account has been repaid.
When Should You Take a Loan?
By carefully planning when to take a loan from your company, you can give yourself a more manageable period of time before the loan becomes due for repayment. If you borrow on the final day of your company year you will have the aforementioned nine months to repay it, however by borrowing on the first day of your company year you can extend this to twenty one months.
You may also be tempted to repay the loan then immediately borrow from the company again. This is a well known tax avoidance tactic to HMRC and they will pursue the tax on the amount borrowed as if the repayment hadn’t occurred.
What If I Can’t Repay It On Time?
Difficulties arise if you are unable to repay your director’s loan on time, particularly if the loan exceeds £10,000. HMRC will take the view that you are benefitting from this loan as it is interest‐free (as opposed to borrowing from a bank), and you will therefore be expected to pay income tax on the amount you have borrowed.
With this in mind, it is vitally important to review this situation at the year‐end as the S455 tax charge can have a significant effect on the company’s cash flow, and any outstanding loans can also delay the filing of accounts by your accountant.
To avoid finding yourself in a situation like this, it is necessary that you carefully track the money you are personally putting into and taking out of your business. The tax implications of an overdrawn director’s loan account can become overwhelming without careful planning.
If you would like to discuss how to best approach managing a director’s loan account, or if you require any additional information regarding the ins and outs of director’s loans in general, please contact us to speak to one of our expert tax advisors today.