Company Director Loans, Disguised Remuneration Schemes & Loan Write-off Implications
A company director loan refers either to money lent to the company, for example, to support its cashflow during a difficult period, or money taken from the company by one or more directors by way of loan.
This article focuses on money taken from the company by way of loan, which is perfectly legal provided that each loan is properly accounted for, complies with the director’s company obligations and is repaid in a timely manner.
A director receives a loan when they take money from a company of which he is a director, provided it is not money previously paid into or loaned to the company, and is not received as salary, dividends, or properly incurred expenses. Whatever the purpose of the loan, the director must repay it in full in accordance with any terms attached, such as interest payments.
Where the company has more than one director, there may be a series of directors’ loans.
Strictly controlling one or more loans through separate director loan accounts is absolutely essential for various reasons, including shareholder and creditor protection, accountability, accurate calculation of any interest payable, and to ensure compliance with HMRC tax requirements.
Failure to comply with the various requirements could result in unanticipated tax bills, financial penalties and potential imprisonment for fraudulent activity.
Tim Thompson of KANGS comments generally upon director loans.
Important Considerations
While the basic act of a director borrowing money from a company may seem a straightforward procedure, especially as it is legal if conducted properly, there are a number of pitfalls awaiting the unwary or those seeking to abuse the system.
The requirements adopted by and affecting small family companies will differ from those affecting multi-national companies, which for example have responsibilities to a multitude of shareholders. However, there is common ground.
Compliance with Company Law
It is essential that every loan to a director is:
- clearly recorded in a separate Director’s Loan Account, ensuring that it is distinguished from company funds,
- permitted by the company’s constitution,
- properly approved in the manner required by the company,
- not contrary to the best interest of the company,
- not to the unfair disadvantage of shareholders or creditors,
- properly revealed in the company’s annual accounts,
- clear as to such matters as duration and payment of interest.
HMRC Tax Requirements
HMRC’s Regulations are extremely comprehensive and require careful consideration for each discrete transaction. Liability to relevant taxes is likely whenever a director receives a loan, whether payable by the company, director or both and will depend on how the loan is settled.
Amongst many considerations will be:
- whether or not the loan was repaid within nine months of the end of the company’s Corporation Tax accounting period,
- the amount of the loan. Any amount exceeding £10,000 will automatically be treated as a ‘benefit in kind’, attracting further tax,
- the date the loan was made and whether or not it has been renewed,
- whether or not the loan is ‘written off’ or ‘released,’ including if the company is liquidated,
- whether or not the interest paid was below the official rate. This will help determine if the director has received a ‘benefit in kind’ which will be taxed appropriately.
Liability to NIC will be inherent in all calculations and the nature and rate of tax will vary according to the individual circumstances.
Disguised Remuneration Schemes
The potential exists for one or more unscrupulous company directors to seek to gain an unfair tax advantage by avoiding repayment of any loan received and any income tax or NIC attached.
In previous articles we have explained in detail the nature of ‘disguised remuneration schemes’ and particularly, when considering directors, ‘loan based remuneration schemes.’
Directors may abuse their power by, for example, paying themselves loans instead of immediately taxable income, which they never intend to repay and, thereafter, liquidating the company at a strategic moment, either seeking to conceal the existence of the loan or claim the absence of funds to repay the debt.
Any director proceeding in this fashion may hope to achieve a tax advantage by avoiding payment of income tax and NIC that would normally be payable on a standard salary. However, HMRC is very alert to any transactions of this nature, and anyone found abusing the system can expect to be very heavily penalised.
Repaying a Directors Loan
Failure to repay within the requisite period may result in a charge to temporary corporation tax at the rate of 33.75%, which, whilst recoverable once the loan has been repaid, may well inflict an unhealthy blow to the company’s cashflow in the interim period.
Two essential dates requiring compliance are the:
- company’s year- end. If still outstanding, the loan will have to be disclosed in the company’s accounts and will become public knowledge when they are filed,
- accounts filing date for the year the loan was received. The filing deadline is nine months after the year end, which allows nine months from the accounting year end to repay it.
Whilst arrangements can be made to take out a new loan to replace the repaid one, HMRC regards such activity as simply extending the original loan, with attendant higher levels of tax liability.
As with a number of elements concerning the conduct of a Director’s Loan Account, expert advise can help legally mitigating potential liabilities to income tax, corporation tax and NIC.
How Can We Assist?
While director loans are perfectly legal and may be beneficial in the short term, HMRC has severely clamped down in recent years on the manner in which they may be operated, to such an extent that they should only be used if absolutely necessary.
Any director who becomes the subject of an HMRC investigation, including one concerning director’s loans, should seek immediate legal representation.
KANGS has gained vast experience guiding and assisting clients engaged in disputes of every nature involving HMRC. Our team of specialist tax solicitors provide expert advice and guidance aimed at resolving whatever issues arise quickly and effectively.
If you are involved in a disguised remuneration scheme, under investigation by HMRC or believe you may soon face investigation, request a confidential consultation with one of our solicitors. You can contact us using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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