Directors loans – are they legal?
A directors loan is where a company director takes money out of the company which does not take the form of a salary or a dividend. Additionally, the money you have taken out is greater than any other payments you have made into the account. If this account is overdrawn, the company is obliged to pay tax on the amount taken if it has not been repaid 9 months after the end of the Corporation Tax accounting period.
The use of this money is known as a ‘loan to participators’ by the HM Revenue and Customs. It is important to note that if you are not self-employed (and thus the money you would take out of the company would be personal money), then the money you are taking from the company does not belong to you; hence the term loan.
How Does a Directors Loan Work?
It is advisable that as a director of the company, you maintain records of loans and ensure actions are carefully noted. A directors loan account has two main activities: receiving money lent by you to the company, and lending money to you from the company.
A Director Lending Money to the Company
If as a director, you lend your company money, this is known as the directors loan account being in credit. If your account is credit, this money can be drawn out at any time, either partially or wholly. This does not have any implications for your Company Tax Return.
A Director Borrowing Money from the Company
If you have taken money out of the company (which is greater than the amount of money you have put in to the company), then this is known as your directors loan account being in debit/overdrawn (much like the process regarding a personal bank account). Please note that this does not apply to salaries or dividends. A directors loan can include cash payments, expenses you have paid for which are personal but have been paid using company funds and money withdrawn for personal use (for example, home renovation or the payment of medical or household bills).
Paying Off a Directors Loan
The two main methods of paying off a directors loan are either repaying the amount owed back into the account, or by the company crediting a payment to the account (this can be done either through a bonus, dividend or salary). However, there are other methods available. The company could release you from having to repay the money through a formal contract, which would have the effect of the company considering the loan repaid. Additionally, the company could decide to write off the loan if they have exhausted methods in trying to recover it.
The Effects of a Directors Loan on your Corporation Tax
The main factor which determines the effect your directors loan has on your corporation tax is the date at which the loan is repaid. If you have repaid the loan by the last day of your company’s accounting period for Corporation Tax then you will not need to inform HM Revenue and Customs about the loan, and you will not need to pay Corporation Tax on it either.
If your company’s accounting period for Corporation Tax has passed, but you pay off the loan within 9 months of this date, then you will still not be taxed on the loan. However, you will have to include details of the loan in your Company Tax Return.
If nine months and one day have passed since the end of your accounting period for Corporation Tax, and you have yet to repay the directors loan in full, you must pay Corporation Tax on that loan. This is currently 25% of the loan. Additionally, you will need to include the details of the loan in your Company Tax Return. Furthermore, HM Revenue and Customs will charge interest on the amount that has been left unpaid. This interest is not repayable.
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