What are the implications of taking a loan from your company?
This area has been the topic of discussion by clients and their advisors for many years. Shareholders who regularly withdraw sums without applying PAYE or voting a dividend are generally treated as receiving a loan from their company. The basic tax rules regarding this practice are well established and, broadly, charge the company to what is often referred as section 455 tax if the loan is not repaid within 9 months from the end of the accounting period. From April 2016 the rate of charge increased from 25% to 32.5%, in line with the higher rate of tax on dividends.
Bed & Breakfasting rules
Lesser known anti-avoidance rules were introduced in 2013 aimed at preventing a practice known as bed & breakfasting. An example is where a directors loan account is overdrawn at the year-end and the balance is repaid to the company just before the 9 months limit expires, thus eliminating the section 455 liability. Shortly after, there is a withdrawal of the same or a similar amount and so the position hasn’t really changed, but for a small period of time.
Provided the company is under the control of five or fewer shareholders (or any number of directors), private limited companies of all sizes can be affected by these rules. Where, within any 30 day period there are repayments to the company of £5,000 or more and new loans of £5,000 or more are made after the end of the accounting period, then the repayments are effectively ignored, such that they do not reduce the original year-end balance.
A simple illustration of a company with a 31 May 2017 year end can show what problems can arise in practice.
| Date | Withdrawals | Repayments | Repayments dis-regarded | Qualifying repayments |
| Overdrawn balance @ 01/06/17 | £100,000 |
|||
| 06/06/17 | £10,000 | |||
| 02/07/17 | (£8,000) | £8,000 | ||
| 05/08/17 | (£1,000) | (£1,000) | ||
| 25/11/17 | £20,000 | |||
| 05/12/17 | (£15,000) | £15,000 | ||
| 20/12/17 | (£5,000) | £5,000 | ||
| Totals | £30,000 | (£29,000) | £28,000 | (£1,000) |
| Net s455 position 9 months after y/end | £71,000 | Actual position under B&B rules | £99,000 | |
| s455 @ 32.5% | £23,075 | £32,175 |
Failure to monitor movements in the loan account in this example have resulted in an additional (and possibly unexpected) tax liability of £9,100.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.