Are you a company director? Have you ever borrowed money from your business? Read our article below to find out everything you need to know about how to avoid potential tax charges.
How does this work?
The lines between directors as individuals and the company are blurred if operating in a personal or family-based company.
As a director, you may lend money to the company when cashflow is low, and vice versa the company may lend money to you or be used to pay personal bills. The transactions between the director and the company are tracked via the Directors Account Loan (DAL).
If the DLA is overdrawn at the end of the accounting period and the director owes the company money and the company is “close”, then you should consider the tax consequences. A “close” company is one that is controlled by five or fewer shareholders.
Potential tax charge
Tax charges arise to the company if the Directors Loan Account is overdrawn at the end of the accounting period and remains overdrawn for nine months and one day after the end of that accounting period.
This will be the date which corporation tax for the accounting period is due. The overdrawn amount will constitute as a loan to the director from the company.
A tax charge (known as ‘section 455 charge’) is 32.5% of the amount of the loan. The rate of section 455 tax is the same as the higher dividend rate.
Phil is the Director of his personal company Sweet Treats Ltd. Accounts are prepared to 31 December each year.
On 31 December 2018 Phil’s directors loan account is overdrawn by £100,000. The account remains overdrawn on 1 October 2019 (the date that corporation tax for the period is due).
So, the company must pay section 455 tax of £32,500 (£100,000 @ 32.5%).
How to avoid the charge
The section 455 charge can be avoided even if the loan account was overdrawn at the end of the accounting period. It can be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the period.
This can be done in a variety ways:
• The company can pay a bonus to clear the loan balance
• You can pay funds into the company to clear the loan
• The company can declare a dividend to clear the loan balance
• Your salary can be credited to the account to clear the loan balance
You should note that, apart from if you introduce funds into the company, the other options mentioned above will trigger their own tax bills.
In the case that the tax on the dividend or bonus credited to the account to clear the loan is more than the section 455 tax, then clearing the loan may not be the best option- it is easier to pay the section 455 tax.
A temporary tax
Section 455 is only a temporary tax. It is refunded nine months and one day after the end of the year in which the loan is cleared.
There are anti-avoidance rules, which apply to prevent the director clearing the loan shortly before the section 455 trigger date, to then re-borrow the funds shortly after.
It is essential that you understand as a company director the potential tax charges from borrowing from your business.
If you require any help or guidance then please just get in contact with us, and we will be happy to help you with preventing unnecessary tax charges.
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