Year End Tax Planning Guide
In many family companies, director-shareholders have 'loan' advances from the company. These are often personal expenses paid by the company: but essentially a director's loan is any money received from the company that is not salary, dividend, repayment of expenses, or money you have previously paid into or lent to the company. Such monies are accounted for via a 'director's loan account' with the company. At the year end, the tax position for both company and director depends on whether the loan account is overdrawn – so that someone owes the company money – or whether it is in credit.
Tax charge on company
A tax charge on the company arises where the overdrawn balance at the end of the accounting period is still outstanding nine months later.
For loans made on or after 6 April 2016, this is an amount equal to 32.5% of the loan, but where the balance is repaid, there is no tax charge. This has given rise to the situation where loan balances are sometimes repaid in time to avoid a tax charge, but a further loan to the shareholder is then made almost immediately afterwards. HMRC is keen to ensure that the loan rules are not manipulated, and complex arrangements exist to enforce this. They do not apply however where there is a genuine repayment through the award of a valid bonus or dividend.
This is an area in which HMRC is taking an increasing interest. If you are concerned about whether the tax charge could apply to your company, we would be happy to advise.