A director’s loan is an essential financial record detailing transactions between a company and its directors or their close family members. Whether lending money to your company or borrowing from it, these transactions come with specific benefits and tax implications you need to understand.
Lending Money to the Company
Directors who lend money to their companies can charge interest if the funds are used solely for business purposes. The interest rate should be comparable to what the company would pay a third-party lender, ensuring it is at a commercial rate. This interest is deductible for corporation tax purposes, reducing the company’s taxable profits. However, the company must deduct basic rate tax from the interest payments and report this to HMRC using form CT61. Any excess tax deducted can be reclaimed by the director through their personal tax return.
Borrowing from the Company
Borrowing money from your company has different rules. If a director borrows money that isn’t repaid within nine months following the end of the company’s financial year, the outstanding loan is subject to Section 455 of the Corporation Tax Act 2010. This mandates that the company must pay tax on the outstanding amount at a rate of 33.75%.
This tax is repayable once the loan is settled, but the repayment is not immediate. The company receives the tax repayment nine months and one day after the end of the accounting period in which the loan was repaid.
For loans exceeding £10,000, additional considerations arise. If such a loan is not repaid within nine months after the financial year-end, it is treated as an employment-related loan, incurring a taxable benefit. Directors who do not pay interest on this loan will have the taxable benefit calculated based on HMRC's Official Rate of interest. Consequently, the director incurs a tax liability on the P11D form, and the company triggers a tax payment obligation at 33.75%.
Tax Enquiries and Compliance
Directors should be prepared for potential HMRC enquiries. Having a clear and detailed transaction history is essential to substantiate the nature and terms of the director’s loan.
Writing Off the Loan
In some cases, it might be possible to write off the loan, but this action has its own set of income tax and National Insurance (NI) implications, which should be carefully considered before proceeding.
Understanding these complexities ensures that directors can manage their finances effectively while staying compliant with tax regulations. Navigating the intricacies of director’s loans can safeguard both the company and its directors from unexpected tax liabilities and penalties.
Stay informed and manage your finances smartly!
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