What are Director's Loans?
One of the biggest advantages of running a Limited company is that you, the director and shareholder of the Limited company, are separate from the Limited company itself.
But this then means that the cash in the Limited company doesn't technically belong to you until you take the cash out as salary or dividends. However, you can access this cash by way of a directors loan.
This is something that can easily get forgotten but it can have serious consequences for you as a director if you take money out of the company without understanding the rules.
Lets look at Directors loans in a little more detail and explain some implications you may need to be aware of...
What is a Director's Loan?
HMRC defines a directors loan as "money that is taken from the company that isn't either a salary, dividend or expense repayment, or money that you've previously paid into or loaned the company."
So if you make any cash withdrawals from the company or if any personal expenses are paid with company cash or credit card these should be recorded in your directors loan account.
Who can take a Director's Loan?
As the name suggests only directors of the limited company can take a loan from your company.
You can provide employees with loans from the limited company but these are subject to different tax rules.
Why take a Director's Loan?
There may be times when you may need extra cash such as your car has stopped working and you need to fix or replace it quickly.
How to take a Director's Loan
There is a little more to it than just withdrawing the cash out of the company bank account!
You need approval from the company shareholders, especially if the loan is over £10,000. If you're the only director and shareholder of the Limited company then getting approval will be easy. You should have a copy of this approval in writing.
How to repay a Director's Loan?
If you owe the Limited company, the easiest way to repay the cash back to the company is by using part of your salary or dividend payment (which you will be taxed on personally as usual).
Overdrawn Director's loan accounts (where you owe the Limited company money) should be repaid within 9 months of the company's year end otherwise there will be extra tax to pay by the Limited company.
Are Director's Loans taxable?
This is where it gets a little bit complicated!
The simple answer is it depends on when the Director's Loan is repaid.
If you repay the entire loan within 9 months of the company's year end no tax is owed by the Limited company.
But if the Director's Loan is still overdrawn at this point (9 months after the company's year end) additional Corporation Tax of 32.5% is owed on the balance outstanding. This is called Section 455 CTA Tax.
The good news is that any Section 455 CTA Tax will be repaid to the Limited Company once the director's loan has been repaid. This can only be done in writing 9 months and 1 day after the end of the company's year end in which the loan was repaid (so there can be a bit of a delay getting the cash back from HMRC).
'Bed and Breakfasting'
So can I repay the Director's Loan so the company doesn't pay the additional tax and then take a new Director's Loan?
HMRC has thought about this too and put in some 'Bed and Breakfasting' legislation to prevent this happening.
Bed and Breakfasting occurs when a director repays the loan in full before their year end to avoid extra tax and then immediately takes another loan with the intention of never repaying it.
HMRC has implemented a measure to prevent this. When a loan over £10,000 is repaid by the director no other loans in excess of £10,000 can be taken within 30 days. If this happens the full amount of the loan will be taxed.
To make things even more complicated there are certain circumstances where where the bed and breakfast rules will apply even if outside of the 30 day rule. If you make a repayment towards your directors loan of more than £15,000 within 30 days and intend to take a new loan of over £5,000 in the future, the 'bed and breakfasting' rules apply.
What if I cannot repay a Director's Loan?
It may never have been the intention but these things happen.
If possible we would hope that the Director's Loan is repaid by declaring an extra dividend through the Limited company if profits allow.
If by failing to repay the loan the company faces financial difficulty and has to be liquidated, the liquidator can chase you for repayment. In extreme cases you could be sent to court or even be made bankrupt.
Is a Director's Loan a benefit in kind?
A benefit in kind is usually a perk received from the company instead of salary or wages. More common benefits include company cars and access to private medical insurance.
HMRC tax benefits in kind so that they are not used to replace your salary.
HMRC will deem a Director's Loan to be a benefit in kind if:
The loan exceeds £10,000
You're not paying any interest on the loan
The interest you're paying is below HMRC's average beneficial loan rate
If the loan meets any of the criteria above then it'll be classed as a benefit in kind and the company will be required to include it on your P11D. To avoid this we would recommend paying interest on the loan at the HMRC average beneficial loan rate.
If the loan is under £10,000 and no interest is charged there is no benefit in kind.
Director's Loans can be complicated so I would always recommend speaking to your accountant before taking a Director's Loan. If you need any help or would like to find out more please feel free to contact me.