Director loan overdrawn and paying back
Directors loan account is a way to keep track of the transactions. It is take place between the director and director own personal or family business. However, there are tax ramifications for the company. If the director owes money to the company. The loan remains due nine months and one day after the end of the accounting period. This is the day when the corporate tax for the period is payable. If this is the case, the company must pay a tax of 32.5% of the overdrawn amount (S455 tax).
Avoiding a Section 455 paying tax
For the company an additional amount of corporation tax (often referred to as “section 455 paying tax”) is payable. If the loan is not repaid within nine months of the accounting year end. Tax on directors loans amount payable is 32.5% of the balance owed to the company at the accounting year end. The good news is that this is only a temporary tax. Because once the loan is repaid (more than nine months after the year end). The tax is then repaid to the company (but not until nine months after the end of the accounting year in which the loan is repaid).
Rule 1: The 30-day rule for Director loan
Director loan can of course be repaid by the director other than by way of a dividend. Director could pay personal monies into the company to achieve the same result. But be wary of the anti-avoidance rules which can apply where a loan is repaid from personal funds. The 30-day rule applies when a participant borrows from the company again within 30 days after being repaid £5,000 or more. It is within a period starting 30 days before, and ending 30 days after, the loan repayment date. In this event the directors loan repayment amounts (up to the amount of the new loan) are ignored in deciding whether a loan has been repaid within nine months of the year end.
Rule 2: The intentions and arrangements rule for Director loan
The intentions and arrangements rule allows the tax office will give second chance. When the 30-day rule does not apply due to the length of time between repayment and director new loan. This rule uses a motivation test and may detect repayments and new borrowings made more than 30 days apart.
The intention and arrangements rule applies when the outstanding loan sum is at least £15,000. There are plans to borrow £5,000 or more in the future. This rule applies even if the new borrowing is beyond 30 days old. The rule applies if the repayment is made with the intention of withdrawing at least £5,000 from the payment, regardless of when it is done. So waiting 31 days before reborrowing won’t work. The rule does not apply to dividends, salaries, or bonuses, since they are subject to income tax.
Genuine repayment
Clearing an outstanding director loan to company debt to avoid a Section 455 charge. It is only tax-efficient if done via dividend, bonus, or salary payments, which are taxed separately, or by utilising money from outside the company.
Distributable profits
If the business does not perform as well as expected profit. There may not be sufficient “distributable profits” from which to pay the expected dividend, and the director’s loan may remain outstanding for longer than expected. This can have two tax consequences, one for the company and its corporation tax, and one for the director’s personal tax.
What is the interest rate for director loan?
A personal tax liability will arise if a loan of more than £10,000 is outstanding, to a director, for more than one complete tax month (ie. starting on the 6th day of each month). Director pays no interest on the loan (or pays interest as less than the “official rate”, currently 2.5%). A taxable benefit in kind arises, at 2.5% per annum, normally on the average balance owed to the company. But this can be calculated on a daily basis if either HMRC or the taxpayer chooses this alternative. This personal liability arises irrespective of whether the loan is repaid within nine months of the year end or not.
It is important to be aware of the balance outstanding on a directors loan account credit at any given point in time. To ensure that repayments are carefully planned and monitored, to minimise tax liabilities.
