Autors: Chrysilla de Vere, Ashan Arif, and Stuart Mullins
It is not unusual for a Company to lend money to a director of a Company, nor is it unlawful. However, there are a number of points to consider, including declarations of interest and how this sits with the constitution of the Company and a directors’ statutory duties generally and also the treatment of the loan from a tax perspective – not only for the director but the Company too.
If a director loan balance remains outstanding 9 months after the Company year end, this will give rise to an additional Corporation Tax charge to the Company in the sum of an amount equal to 32.5% of the loan balance. Whilst the corporation tax is repayable by HMRC once the loan has been repaid, depending on the size of the balance and the financial position of the company, this impact adversely cash flow.
If you are a director and a shareholder with an interest-free or low interest loan of more than £10,000, your loan will be treated as a benefit in kind where your company will pay tax on the deemed value of any interest you have saved. The difference here is that you will also be subject to pay income tax through your self-assessment tax return.
It is important therefore to have regard to the timings of loans and understand when a corporation tax liability for the company could arise. It maybe possible to call a dividend to seek the settlement of the balance, or, in certain circumstances structure a share buy back to reduce the loan balance. In each instance, tax advice and legal advice ought to be sought and followed strictly.
When borrowing money from your company, it is important to understand that the company is a separate legal personality and therefore you should consider any loan advance as if it was coming from a separate person.
- Document the loan, be clear on the term of the loan.
- Give thought as to whether interest is payable and if not, and the loan is more than £10,000.00 be aware of the “benefit in kind” rules that will attract to the loan.
- Keep a board minute detailing the reasons why the company made the loan and when it agreed to advance the proceeds.
- Be aware of the rules around “bed and breakfasting”.
- Understand that if your company falls into difficulties, insolvency professionals and creditors are likely to require the re-payment of the loan and the Courts have powers to enforce repayment against you.
