A Directors Loan Account
Your company may pay personal expenses on your behalf for which you later reimburse the company, or it might otherwise lend you money.
This means you have a variable outstanding debt owing to the company, which is known as a directors loan account. Where that debt exceeds £10,000 at any point in the tax year, this triggers a taxable benefit for you based on the nominal interest you should have paid on the loan for the whole period during which the loan was overdrawn (not just the days when the balance was above £10,000).
The company also has to pay Class 1A NICs at 13.8% on the value of the benefit. Say you owed the company £12,000 and that debt was outstanding from 6 April to 5 July 2023, when it was cleared by a dividend. The benefit in kind would be: (2.25% x 12,000) x 3/12 = £67.50. As a 40% taxpayer you would pay tax on this benefit of £27.
The company would pay NICs at 13.8% on £67.50 = £9.32. If your loan from the company was not repaid by the date the corporation tax is due (9 months and 1 day after the end of the accounting period). The company also has to pay a corporation tax charge at 33.75% of the loan.
This charge can be recovered when the loan is repaid, but it’s a big incentive to clear the outstanding director’s loan account within nine months of the year-end. Please discuss with us the most tax efficient way of clearing any loan from your company. However, be aware that the value of the loan will be taxable on you if it is waived or written off by the company.
What if you don’t pay the loan back?
In the UK, if a director doesn’t repay a director’s loan to the company. There are specific tax and legal consequences that can arise. It’s important to note that the rules and regulations can be complex and might change over time. So it’s advisable to consult with a qualified accountant or legal professional for the most up-to-date and accurate information.
However, here are some general considerations:
S.455 Tax Charge:
One of the primary consequences of not repaying a director’s loan in the UK is the application of the “S.455 tax charge”. Also known as the “close company loan charge.” This charge is intended to discourage directors from using their companies as a means of borrowing money without paying appropriate taxes. If a director’s loan is not repaid within nine months of the end of the company’s accounting period. The company is required to pay a tax charge equal to 32.5% of the outstanding loan amount. This tax is paid to HM Revenue and Customs (HMRC). However, if the director repays the loan within a certain time frame . The company can claim a refund for the tax paid.
Benefit in Kind:
If the loan is not repaid and no interest is charged on the loan, the outstanding loan amount might be treated as a “benefit in kind” for the director. This means that the director could be personally liable for income tax on the outstanding loan amount. At their marginal tax rate.
In some cases, if the loan is not repaid, it might be treated as if the company paid the director a dividend equal to the outstanding loan amount. This could have tax implications for both the company and the director.
Potential Legal Action:
If a director’s loan is not repaid the company wants to recover the outstanding amount. It might need to take legal action against the director. Legal proceedings could result in the director being required to repay the loan, along with potential interest and legal costs.
Company Accounts and Reporting:
Non-repayment of a director’s loan can also impact the company’s financial statements and reporting requirements. The loan might need to be classified as a “loan to a participator” in the company’s accounts. As well as failure to comply with reporting requirements can result in penalties.
Disqualification as Director:
In severe cases, a director who misuses or fails to repay a director’s loan could face disqualification as a company director. Disqualification can have serious implications for an individual’s ability to serve as a director of any company.
It’s crucial to engage with qualified professionals, such as accountants and legal advisors. To ensure that all relevant tax and legal requirements are met when dealing with director’s loans in the UK. This helps avoid potential tax liabilities, penalties, and legal complications.