There has been an increase in the rate of tax on loans to ‘participators’ from 6 April 2016 meaning it will be more costly for the company to make such loans. Changes to the personal tax regime from 6 April 2016 have meant that the receipt of interest by shareholders on loans they have made to their companies may be an attractive means of distributing some of the profits of the company.
Loans from the company
If a close company makes a loan to a director/ shareholder, the company must make a payment to HMRC if the loan is not repaid within nine months of the end of the accounting period. The amount of the corporation tax is 32.5% of the loan if the loan is made on or after 6 April 2016. For loans made before this date the tax is 25%.
If the loan is repaid after the company has paid over the tax, it will be repaid but not until nine months and one day after the end of that accounting period in which it is repaid.
A loan not only includes advances, but also current accounts held by directors in their companies. Loans to an ‘associate’ of a shareholder, such as a relative, are also included as if the loan had been made to the shareholder.
So why can’t we simply pay off the old loan and take out a new loan a few days later?
A shareholder may organise his finances such that he repays the loan just before the end of the nine month period so no tax charge arises on the company. Shortly afterwards the company provides another loan to the shareholder. In substance the shareholder has continual use of the money from the company but the company does not suffer the tax that would otherwise arise.
HMRC introduced new tax law in 2013 to ensure this doesn’t work. There are two main rules:
The first is a 30 day rule. This applies for loans of £5,000 or more. If at least £5,000 is repaid to the company and within 30 days new loans or advances of £5,000 or more are made to the shareholder (or an associate), the old loan is effectively treated as if it has not been repaid. As a consequence additional tax may become due.
The second is an arrangements rule. It applies where the outstanding amount from the shareholder is £15,000 or more and at the time the loan is repaid, arrangements had been made to make a new withdrawal with the effect of replacing some or all of the amount repaid, and a new payment is made to the shareholder or an associate under the arrangements of £5,000 or more.
If the new tax law applies there will be an increase in tax liabilities.
What should be done by the company and shareholder so that the additional tax does not arise?
If loans or advances on a current account are made to a shareholder, the amounts need to be cleared within nine months of the accounting period in which these amounts arose. This can be achieved by:
• the shareholder repaying the loan by making a payment in cash, or
• the company declaring a dividend or granting a bonus which is equal to the amount outstanding.
If the company decides to release the shareholder from repaying the loan the shareholder is assessed on the income as dividend income, as opposed to earned income. However the dividend is subject to Class 1 employer and employee NICs if the individual is a director or employee of the company.
For the company, a release of the loan will be treated as if the shareholder has repaid the loan and thus the company will be entitled to a repayment of any additional tax paid.
How we can help?
Please talk to us if you are considering obtaining a loan from your company or providing further finance to the company. We can then advise on the effects of the transaction in good time.