Borrowing from your own business

[R11ysf]

OK, so I'm just thinking out loud here so please shoot it down if it doesn't work, but, Lord Blackadder, I think I have a cunning plan.

If I borrow money from my business as a director I have to pay 4% interest and if I have the loan for over 9 months I have to place 25% of the loan value with HMRC to cover what would be the dividend tax until I clear the loan. Understood.

Money on deposit at the bank gets a poxy 1.2% or similar.

So, if I decided to lend money out at 2% to get a better return that would be perfectly fine and the 2% return would be recorded as profits in to the business.

So, my Baldrick moment: What if I decide to lend money to my friend's business from my business and he lends me the same amount from his business. Have I managed to circumvent the 4% interest rate and also the 25% HMRC deposit rule?

We would both be generating a better return for our business than leaving the money in the bank and we would also be getter a better deal than borrowing directly from our companies. I see this as a win-win but I'm sure there is something glaringly obvious I am missing. Thoughts anyone?

[anonymous-user]

So this is a scheme designed to avoid the payment of tax rule with no benefit other than to avoid the payment of tax.

I am not an accountant but i think you should go for it and less us know how it all plays out.

[Newc]

Wouldn't both your businesses need a CCL ?

[R11ysf]

sugerbear said:

So this is a scheme designed to avoid the payment of tax rule with no benefit other than to avoid the payment of tax.

I am not an accountant but i think you should go for it and less us know how it all plays out.

Cheers for a non factual, non helpful and utterly useless, answer. As I wrote above it gets a better return for money in the bank from my business - you know that's how businesses are meant to run, employment of capital to create returns??

If you are going to post so infrequently and they are all going to be so confrontational and pointless I'm not sure it would be missed if that post rate dropped to zero.

Does anyone know that actual answer please?

[Eric Mc]

f you withdraw a capital sum from the business as a loan and give the money to a friend - but then put the capital sum back into the company bank again fairly quickly, you will avoid the Corporation Tax charge on the loan balance because, as far as your company is concerned, the loan has been repaid in full.

Don't forget that there will be a PAYE Benefit in Kind tax charge if the loan exceeded £5,000. If the loan existed for a short period of time (say 20 days), then the BIK charge is based on the fraction 20/365.

Also, there are reporting and disclosure requirements under the Companies Act for transactions with directors, especially loans.

[R11ysf]

Eric Mc said:

f you withdraw a capital sum from the business as a loan and give the money to a friend - but then put the capital sum back into the company bank again fairly quickly, you will avoid the Corporation Tax charge on the loan balance because, as far as your company is concerned, the loan has been repaid in full.

Don't forget that there will be a PAYE Benefit in Kind tax charge if the loan exceeded £5,000. If the loan existed for a short period of time (say 20 days), then the BIK charge is based on the fraction 20/365.

Also, there are reporting and disclosure requirements under the Companies Act for transactions with directors, especially loans.

Thanks Eric, maybe I wasn't clear enough. If I lend money to a non employee, non-director for a fixed ROI higher than the money is getting in the bank then he wouldn't be liable for any BIK tax would he?

[Ade07]

R11ysf said:

Cheers for a non factual, non helpful and utterly useless, answer.

Well it is Pistonheads!

[Eric Mc]

R11ysf said:

[quote]If I lend money to a non employee, non-director for a fixed ROI higher than the money is getting in the bank then he wouldn't be liable for any BIK tax would he?

When you use the word "I" in the above sentence, I presume you really meant to say "my company".

Is the non-employee a "connected person" as defined in the Companies Act?

If they are, it's stil looked on as a loan to you.

[R11ysf]

Eric Mc said:

When you use the word "I" in the above sentence, I presume you really meant to say "my company".

Is the non-employee a "connected person" as defined in the Companies Act?

If they are, it's stil looked on as a loan to you.

Thanks again Eric. Having just read the Companies Act 2006 Section 9.7 definition, I would say they are NOT a connected person. He is someone I know in the same industry to me who also has a business sitting on a pile of cash generating virtually no return. We could both get slightly better return than the bank by setting up reciprocal loans from our respective businesses to each other as well as using the extra 25% that would normally be deposited with HMRC in a mortgage offset account.

Does this idea appear to have legs then?

[Eric Mc]

I think it might work in the sense that the loan is not to a director nor is it to a connected person. It would probably need to be described in some way in the Notes to the Accounts.
However, if the PURPOSE if the loan is eventually to get money out of the business into your personal hands without having to notify HMRC or Companies House about what is going on, then you could stil have reporting and/or tax issues.

How would you plan an describing the loan in the Balance Sheet and the Notes to the Accounts?

"Sundry Debtor"?
"Other Debtor"?

If the title is vague and the amount material, you would be exposing your company to HMRC enquiry.

[R11ysf]

Eric Mc said:

I think it might work in the sense that the loan is not to a director nor is it to a connected person. It would probably need to be described in some way in the Notes to the Accounts.
However, if the PURPOSE if the loan is eventually to get money out of the business into your personal hands without having to notify HMRC or Companies House about what is going on, then you could stil have reporting and/or tax issues.

How would you plan an describing the loan in the Balance Sheet and the Notes to the Accounts?

"Sundry Debtor"?
"Other Debtor"?

If the title is vague and the amount material, you would be exposing your company to HMRC enquiry.

Thank you Eric, I do see what you mean. The thought came about as I have a business which generates cash but does not require investment. So I end up with cash in the bank, which as you know, pays virtually nothing on business deposit accounts, circa 1.5%. With inflation rates running at 4 or 5% this was essentially costing me money by leaving it in the business, but would cost me 25% to release it as a director. I intend to leave as much as is possible in there until I close the business and make use of entrepreneur's relief.

So with this in mind I have been taking on higher risk investments with the business money but less of it just to try and keep up with inflation. I then thought that if I lent it to people I know who are *very* trustworthy for use in their offset mortgages I could get a better-than-bank-rate and risk-free return. (I know nothing is risk free).

I then thought that if I lent it to someone in the same situation as me and they lent me the same amount from their business then it really is "risk free" as we have each others business' cash. So for the purpose of the accounts could it not be recorded as investment for capital return?

For clarity we would both pay the interest due to the other's company each month/quarter or whatever.

[Newc]

When I said 'Wouldn't both your businesses need a CCL ?', what I meant was 'Your business will need a Consumer Credit Licence, and so will your friend's, and the cost of those licences is material'.

[R11ysf]

Newc said:

When I said 'Wouldn't both your businesses need a CCL ?', what I meant was 'Your business will need a Consumer Credit Licence, and so will your friend's, and the cost of those licences is material'.

Thanks for that. I did look up the acronym CCL and all I got was Crazy Cat Lady I'll look into it thanks.

[Newc]

R11ysf said:

I did look up the acronym CCL and all I got was Crazy Cat Lady

Ah - someone who has had dealings with the Office of Fair Trading...

[Eric Mc]

It is not that unusual for businesses to make informal loans to staff/directors/outsiders etc. I am pretty sure that these types of non-formal arrangements do not need any sort of licence - unless the business is setting itself up as a lender/financial services business.

The main issues are tax implications and discloure details.

[R11ysf]

Eric Mc said:

The main issues are tax implications and discloure details.

That was my initial question Erie. What disclosure or tax implications arise because my company will actually being paying MORE tax than if i left the money sitting in the bank.

[Eric Mc]

Why do you think the company will pay more tax?

[R11ysf]

Currently money is sitting in the bank account generating 1.5% or less return. If i lend it to someone at 2% or 2.5% then that is a greater amount coming in to the business in profit and therefore more tax due on it.

[Eric Mc]

Have you actually calculated the likely extra Corporation Tax the company will have to pay?

Is it significant?

[Deva Link]

Despite your dismissal of Sugarbear's comments, he/she is basically correct but I'm sure it happens a lot and you might get away with it.

I know a couple of guys who lease high-end cars through each other's companies, so neither pays company car tax. Our accountant is horrified at the idea, but they've done it for some years.