In small companies or family owned companies (close companies), the director often loans money to the company or borrows money as a loan from the business.
The director’s loan account is in credit if the company owes money to the directors. In other terms if the directors have paid expenses on behalf of the company or the dividend declared but not withdrawn or salary payment not made to the directors.
The director’s loan account become overdrawn if the director’s “borrows” money from the company or the company has paid director’s personal expenses e.g. School fees, Car fuel, Health insurance.
Where the director’s Loan Account is over drawn or company makes a loan to the director which is left outstanding for more than 9 months after the company’s accounting period end, the company is required to pay tax under s.455 CTA 2010 (The loans to participators rules). Tax is payable at 25% of the outstanding loan balance. The tax is due at the same time as the company’s corporation tax liability for the accounting period in which the loan is made. This is 9 months from the end of the account period. e.g. if the company year-end is 31 December 2013, the corporation tax is due by 30 September 2013
When the loan is eventually repaid by the director or shareholder, tax previously paid will be refunded back to the company by HMRC, normally within nine months and a day from the end of accounting period in which the repayment of the loan is made.
The chancellor George Osborne in his budget speech on 20 March 2013 made important changes in relation to the overdrawn director’s loan account.
“Bed and breakfasting” is term used: i.e. where the directors of close companies extract funds or loan the money to themselves through overdrawn director’s loan accounts, which are then repaid, just before the date when tax would become due, normally with in nine months of the end of the accounting period in which the loan was made. The money is then loaned very shortly after repayment therefore recreating a similar debt to the company. In other words the directors had no intentions of repaying the loan.
With effect from 20 March 2013, if the loan is repaid within 9 months to avoid S455 charges and there is clear intent for a new loan or take out a new loan, HMRC would deem there to have been no repayment and this will be considered an extension of the original loan and the section 455 tax would be due.
If within a 30 day period, a repayment of over £5,000 is made to the company to avoid the tax charge and then the amount is redrawn no relief would be available.
If a 30 day rule doesn’t apply to deny relief, relief will not available where a debt of at least £15,000 is outstanding. If the loan is repaid and there is an intention to redraw, relief will be denied for the repayment, regardless of the period of time elapsing. Therefore such ‘bed and breakfasting’ is no longer a possibility.
If the director’s loan account is overdrawn over £5,000 at any point during the year, it is treated as an employment related loan. It was proposed in the budget to extend the £5,000 limit to £10,000 in 2014/15.
A taxable benefit will arise where a loan is interest free or the interest charged on the loan is below the official interest rate as set by HMRC (Currently 4.0% for 2013/2014). The cash benefit of the interest free loan for tax purpose is calculated by using an averaging method (see example below) or on daily basis. HMRC will use daily basis where a loan balance fluctuates throughout the year.
The cash benefit is the difference between the interest calculated at HMRC’s official rate and the interest paid. The taxable benefit calculated is required to be reported on P11D.
The tax payable by the director’s or employee will be at their marginal rate i.e. 20%/ 40%/45% on the benefit in kind as declared on the P11D. The company will also need to pay Class 1A national insurance at the rate of 13.8% on the P11D value.
The director of XYZ Ltd takes a loan of £45,000.00 on 30 May 2013. £20,000.00 is repaid on 31 December 2013. Balance of £25,000.00 is outstanding as that of 05th April 2014. The director has not paid interest to the company so the loan is classed as a beneficial loan.
The benefit in kind is calculation:
Loan outstanding at 05th April 2011: £45,000.00
Loan outstanding at 05th April 2012: £25,000.00
Average loan outstanding: £35,000.00
HMRC rate of interest: 4.0%
Benefit in kind value £1,400.00
The benefit kind value £1,400.00 will be reported on the director’s personal tax return and will pay tax at their marginal rate i.e. 20%/ 40%/45%, depending on their employment income and dividends received from the limited company. The benefit in kind is treated as salary and taxed in same way.
The XYZ will pay £193.20 Class1A national insurance on the benefit kind value of £1,400 @13.8% and must be paid by 19 July. Interest will therefore arise on the late payment of this liability.
P11D form must be submitted to HMRC by 6 July after the end of the tax year. A form P11D (b) must also be completed. If this has not been submitted by 19 July, HMRC will levy a penalty of £100 per 50 employees for every month or part of a month that the form is outstanding so where the forms are not submitted till say 12 December, the company faces a penalty of £600.