Director and Participator loans
These types of loans occur where funds are owed to or from a director or shareholder to their limited company.
Funds can be owed to a director/shareholder if they pay money into the company, or if they incur expenditure on behalf of the company and have yet to be reimbursed. These funds can be repaid to the director/shareholder with no tax implications.
Whilst this relationship is referred to as a loan, no interest need be charged, and it is often more tax efficient not to do so.
There can, however, be tax implications if a director/shareholder owes money to their company. This can arise in one of two ways:
- Intentionally taking a loan from the business
- Overdrawing funds from the business. This can be caused by the following:
- Drawing salary exceeding what has been declared to HMRC
- Reimbursing out-of-pocket expenses exceeding what has been added into the accounting software
- Drawing dividends exceeding the company’s retained profit
To avoid overdrawing, you should keep your accounting software up to date and refer to it before paying any expense reimbursements, salary or dividends. You can also check in with your accountant at any point if you are unsure.
If funds are owed from a director/shareholder to their limited company, there are two key tax implications.
Corporation Tax Implications:
If a loan to a director/shareholder is present at a company’s year-end, it must be included in the notes to the financial statements and declared in the company’s corporation tax return.
Generally, this results in a tax charge of 35.75% of the year-end loan amount payable by the company. However, if the loan is subsequently repaid to the business, in full or in part, it may be possible to claim relief against this charge.
We will review entitlement to relief based on the loan value at the end of each subsequent accounting period, unless we are instructed otherwise on a specific issues and repayments within the year.
If there is an entitlement to relief, our standard charge for processing a reclaim is £60+VAT in each accounting period you wish to claim relief.
The timing of when the relief can be claimed is highly dependent on when a repayment to the company is made, and how long the loan is repaid for. Therefore, please discuss any repayments with your client manager who will be able to confirm the tax implications for your specific scenario.
Income Tax/National Insurance Implications:
For directors, an interest-free loan that breaches £10,000 at any point in the tax year is classed as a taxable employment benefit.
This results in an income tax and employer national insurance charge based on the value of the loan over the tax year, and a nominal interest rate set by HMRC for the period.
Therefore, it is often more tax efficient to charge interest (at the rate set by HMRC) on loans above £10,000. However, to ensure the loan is not a taxable benefit:
- The director must have intended, and been obliged, to pay interest on the loan during the tax year.
- The interest charged must have been paid, rather than just added to the loan account.
This means this option is only available if you are aware of the loan during the period in question, and so why it is important to review your accounting software when making drawings.
If interest has not been charged, the taxable benefit can be declared to HMRC via a P11D. Our base cost for the preparation and filing of this is £150+VAT.
Similar rules apply to non-director/non-employee shareholders, however the benefit charge is treated as a company distribution and so taxable as a dividend.