There are often tax implications where small companies provide loans to their directors or “participators” (any person having a share or interest in the capital/ income of the company- normally these are shareholders).
A company is a separate legal entity and company money belongs to the company. The directors and shareholders would also stand to benefit from more favourable terms, than they might get from a bank from example.
To deter companies from making loans to directors or shareholders, a corporation tax charge arises on the company (S455). Previously this has been imposed at 25% but due to the change in the way dividends are taxed from April 2016, the charge is 32.5%.
For small companies, the tax liability normally falls due nine months after the end of the accounting period in which the loan was made.
Repayments – even made up to nine months after the relevant accounting period – would be taken into account before calculating the tax charge. As the loan balance is reduced, HMRC refund the company the S455 tax so the tax charge is only temporary in effect.
However, a taxable benefit in kind would also arise on the recipient of the loan assuming it is over £10,000 and the benefit and therefore the tax charge would arise each year that the balance exceeds £10,000.
With the prospect of the S455 tax being refunded and avoidance of a benefit in kind charge, there is a definite incentive for the loan to be paid back as quickly as possible.
If you’re experiencing cashflow problems, your local TaxAssist Accountant could work with you to produce cashflow forecasts/ business plans. You may also have options available to you to reduce the balance on your loan account. Contact us for more information.
By Jo Nockels
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.