Have you included director’s loans in your tax planning?

For business owners, there are several ways of extracting money from your company – including salary, dividends and expenses.

If you choose to take money out of the business in a way that isn’t accounted for by one of these options, then it will be recorded through a director’s loan account (DLA).

Essentially, you are borrowing money from your own company.

While this can be a simple way of accessing high levels of capital when you need it, there are tax implications which you’ll need to consider.

Failing to do so could result in major penalties, as in the recent case of HM Revenue & Customs (HMRC) and David Kingsmill Plumpton, Director of Botleigh Grange Hotel, Southampton.

Although HMRC was forced to reduce the £90,000 penalty, Mr Plumpton still faced a £200,000 bill and £30,000 fine for improperly filling out Income Tax Self-Assessment (ITSA) when he received the funds.

So, how do you avoid getting in trouble with HMRC? Let’s investigate.

Income Tax

You generally don’t have to pay Income Tax on director’s loans as the tax liability sits with your business.

However, if the loan is ‘written off’ or ‘released’, i.e. it is not repaid, then you must report it via ITSA and pay Income Tax on the loan.

Your company must also deduct Class 1 National Insurance (NI) through its payroll.

Director’s loans as benefits in kind (BIKs)

If a director’s loan is £10,000 or over and free from interest, HMRC will consider it to be a benefit in kind (BIK) – a benefit which an employee or director receives which is not included in their salary, typically provided to the individual at low or no cost.

For a loan of this size, you will need to report it via ITSA.

Your company will also need to deduct Class 1 NI Contributions.

Corporation Tax

Some director’s loans create a Corporation Tax liability, reported to HMRC by form CT600A.

This occurs if a loan or advance has been made to the Director or shareholder from a close company.

A close company must be resident in the UK and controlled by either:

• Five or fewer participators (shareholders or any other person(s) who have shares or an interest in the company capital or income); or
• Any number of directors who are also shareholders.

Under Section 455 CTA 2010, a loan to a close company is subject to Corporation Tax. Therefore, the company, rather than the participator is liable for the tax on the loan.

You should try to repay the loan within nine months of the end of your business’ accounting period (AP) to avoid additional tax on the loan.

If you do this, then your company will pay Corporation Tax according to the following:

• A loan of more than £5,000 (and another loan of £5,000 or more was taken out up to 30 days before or after the original loan was repaid) – Corporation Tax is due at 33.75 per cent.
• If the loan was more than £15,000 (and another loan was arranged upon repayment) – Corporation Tax is due at 33.75 per cent.

If you don’t repay your loan within the given period, then your company will pay Corporation Tax on the outstanding amount at 33.75 per cent, as shown on the Company Tax Return.

After the loan is repaid, your company can reclaim Corporation Tax.

Exception to Section 455

An exception exists for directors and employees of the company or its associated companies when:

• The individual is employed full-time by the company or its associated companies;
• The loan or advance does not exceed £15,000; and
• The individual holds no material interest in the company (i.e. no more than five per cent of the ordinary share capital, or five per cent of the company’s assets).

Record-keeping and planning

Director’s loans come under the purview of financial management and compliance.

For this reason, you must keep detailed records of any money which you have withdrawn from the business or paid into it, as well as any tax you have paid and details of any written-off loans.

This can help you avoid non-compliance with tax regulations and support you if HMRC asks you for more information.

For further advice on director’s loans and financial planning, please contact our team.