In April 2014 the rules with regards to director’s loan accounts changed. Previously each director could have an outstanding loan which if it didn’t reach or surpass £5,000 during the tax year then no benefit in kind tax would be charged. If the loan did surpass £5,000 then the director would be seen as enjoying a cheap loan and would have to pay a benefit in kind tax to HMRC.
The changes in April have doubled this threshold to £10,000.
However there is a complication.
Many directors believe they can now take £9,999 out of the company as a loan and then not worry about paying it back or having to pay a benefit in kind tax. The problem is they may not know or did not ask about how this loan is treated at the company’s year end and how it effect Corporation Tax.
Any loan of any amount still outstanding at the company’s year end must be declared on the company’s CT600 Corporation Tax return. If the loan is then repaid within 9 months and 1 day of the company’s year end (the Corporation tax payment deadline) then it is stated on the return as being cleared and no additional tax is payable. However if it is still outstanding 9 months and 1 day after the company year end an additional 25% of the total loan outstanding is payable as an additional Corporation tax charge.
If you think that you can simply clear the director’s loan account with a temporary loan from a friend or family member and then withdraw it again to pay the friend or family member back, you would be wrong. HMRC simply views the repayment as not taking place and the additional tax charge stands.
Our advice - use your director’s loan account during the company year to borrow up-to £10,000 (not a penny more) and then ensure it is all paid back and cleared before the company year end, result; no benefit in kind charge and no additional Corporation tax payment.
If you have any questions about this, please do get in touch and we’ll be happy to talk it through with you.