Directors loan - avoiding "bed and breakfasting"

[Silverage]

I think I'm right in my assumption that if I take a directors loan of up to £10,000 from my company and then pay it back, with the statutory interest, all within the same financial period for the company, I'm doing nothing wrong. Is anyone here of a contrary opinion?

I want to avoid falling into the "bed and breakfasting" trap.

[Eric Mc]

There are two sets of tax rules relating to "Overdrawn Directors' Loan Accounts" -

one set relates to Income Tax Benefit in Kind rules

and the second set relates to Penalty Corporation Tax (Section 455)

You need to be aware of the different requirements of these separate sets of rules.

[Equus]

Could you expand on the implications of these two sets of rules, Eric?

[Silverage]

Equus said:

Could you expand on the implications of these two sets of rules, Eric?

I’m hoping because I’m proposing to have the whole thing done in the one financial period and that I’m paying interest to the company, that I will fall foul of neither.

[Panamax]

Handy link here which explains the subject and includes B&B,
https://www.crunch.co.uk/knowledge/article/directo...

[anonymous-user]

Silverage said:

Equus said:

Could you expand on the implications of these two sets of rules, Eric?

I’m hoping because I’m proposing to have the whole thing done in the one financial period and that I’m paying interest to the company, that I will fall foul of neither.

I'm not an accountant so this is not advice!!, but my understanding was you only need to pay interest if it's over 10K.

[Silverage]

Panamax said:

Handy link here which explains the subject and includes B&B,
https://www.crunch.co.uk/knowledge/article/directo...

Thanks. I read a couple of articles along those lines earlier. Again, if everything is done and dusted by the end of the financial period and the director’s loan account is back to £0 by then, I’m thinking none of these penalties can apply?

[Eric Mc]

Panamax said:

Handy link here which explains the subject and includes B&B,
https://www.crunch.co.uk/knowledge/article/directo...

That article is pretty good as it goes through the ramifications of directors borrowing from their own company.

The £10,000 limit is entirely related to the PAYE Benefit in Kind rules and does not apply to the S.455 Corporation Tax situation.

If a director has a loan from their own company, he/she essentially has received money on which no personal tax or NI has been paid (yet) - in other words, it's not salary and/or its not dividends on which Income Tax would normally be payable - and National Insurance as well in the case of salaries.

HMRC does not like this (obviously) so they have a number of provisions to limit the extent to which directors can use loans to circumvent tax or NI.

Any loan over £10,000 will be assessed as a taxable Benefit in Kind UNLESS the company charges the recipient of the loan interest on the loan. HMRC sets the interest rate that needs to be charged to avoid a BIK charge. Don't forget that interest charged by the company becomes company income in its own right and will most likely be subject to Corporation Tax.

S.455 is quite a bit more onerous. If the director owes money to the company at the company's year end balance sheet date, the balance that the director owes MUST be declared in a note in the full statutory
accounts. This note also needs to state whether the loan was extinguished after the year end date and what the lending terms and conditions are. It also should disclose the name(s) of the director involved and the balances each owe.

If the loan was not extinguished or will not be extinguished within 9 months and 1 day of the balance sheet date, then penalty Corporation Tax at a charge of 35% of the loan balance MUST be paid ON TOP OF the company's normal Corporation Tax liability.

The penalty Corporation Tax charge will be repaid by HMRC once the loan has been repaid by the director BUT evidence for the repayment has to be supplied by the company to HMRC - evidence such as copies of bank statements etc to show that the money was actually recovered from the director.
This can take a long time - sometimes up to 4 years.

The best policy is NOT to borrow from your own company.

[Eric Mc]

Silverage said:

Thanks. I read a couple of articles along those lines earlier. Again, if everything is done and dusted by the end of the financial period and the director’s loan account is back to £0 by then, I’m thinking none of these penalties can apply?

There may still be a requirement for disclosure of the existence and use of directors' loan accounts by the company to be made in the company's statutory accounts.

Companies making loans to directors need to be aware of other factors beyond tax - such as treating directors favourably ahead of other other parties - such as employees or suppliers (or HMRC )

[Panamax]

Eric Mc said:

The best policy is NOT to borrow from your own company.

^^^ Whilst only a short sentence its meaning is clear.

IMO it's not worth playing games with HMRC. If they choose to "pop round for a chat" they can make life awkward, time consuming and expensive. The long term value of an easy life with Mr HMRC is never to under-estimated!

[JimmyConwayNW]

I had a partnership company which grew rather quickly and ended up with a pretty large profit and then a pretty large tax payment.

Incorporated and went LTD. Accountants advised to sell the goodwill of partnership to ltd and then had a big directors loan set up for which I had already paid the tax as a sole trader / partner.

Am I likely to come under HMRC scrutiny for this? Accountants seem fairly above board, large outfit etc and assured me it was normal but I know very little about directors loans.

[Eric Mc]

JimmyConwayNW said:

I had a partnership company which grew rather quickly and ended up with a pretty large profit and then a pretty large tax payment.

Incorporated and went LTD. Accountants advised to sell the goodwill of partnership to ltd and then had a big directors loan set up for which I had already paid the tax as a sole trader / partner.

Am I likely to come under HMRC scrutiny for this? Accountants seem fairly above board, large outfit etc and assured me it was normal but I know very little about directors loans.

Did you pay Capital Gains Tax on the sale of the goodwill?

[JimmyConwayNW]

Eric Mc said:

Did you pay Capital Gains Tax on the sale of the goodwill?

I'll check but I am pretty sure yes.

[Eric Mc]

You would normally be expected to.

The iniquity is that that the entity that bought the Goodwill cannot get tax relief on the purchase.

[Exiled Imp]

Eric Mc said:

JimmyConwayNW said:

I had a partnership company which grew rather quickly and ended up with a pretty large profit and then a pretty large tax payment.

Incorporated and went LTD. Accountants advised to sell the goodwill of partnership to ltd and then had a big directors loan set up for which I had already paid the tax as a sole trader / partner.

Am I likely to come under HMRC scrutiny for this? Accountants seem fairly above board, large outfit etc and assured me it was normal but I know very little about directors loans.

Did you pay Capital Gains Tax on the sale of the goodwill?

Obviously not knowing the particular facts and circumstances, but on the face of it this is strange advice.

With incorporation relief available the gain could have been rolled over. Cash of the partnership could have been transferred as a DLA. Selling goodwill separately would break the conditions for incorporation relief and so the whole transaction would be taxable. This would only make sense if it was covered by your annual allowance.

As Eric mentions, with the transaction you describe with goodwill, the gain is taxable on you without corresponding taxable relief in the company.

[tumble dryer]

Exiled Imp said:

Eric Mc said:

JimmyConwayNW said:

I had a partnership company which grew rather quickly and ended up with a pretty large profit and then a pretty large tax payment.

Incorporated and went LTD. Accountants advised to sell the goodwill of partnership to ltd and then had a big directors loan set up for which I had already paid the tax as a sole trader / partner.

Am I likely to come under HMRC scrutiny for this? Accountants seem fairly above board, large outfit etc and assured me it was normal but I know very little about directors loans.

Did you pay Capital Gains Tax on the sale of the goodwill?

Obviously not knowing the particular facts and circumstances, but on the face of it this is strange advice.

With incorporation relief available the gain could have been rolled over. Cash of the partnership could have been transferred as a DLA. Selling goodwill separately would break the conditions for incorporation relief and so the whole transaction would be taxable. This would only make sense if it was covered by your annual allowance.

As Eric mentions, with the transaction you describe with goodwill, the gain is taxable on you without corresponding taxable relief in the company.

Impressive lurking.