Repaying a directors loan

[koops]

Hi everyone,

need some help with a question regarding repaying a directors loan.

My accounting period ended at on the 31st November 2013. My accounts are due at the end of august and I have been advised I have an overdrawn account directors account of 17K

I cant afford to pay the entire amount back and asked my accountant if I could pay back 10K now with the aim of reducing the amount of CT I have to pay. The accountant has advised that I must pay the full 17K in order to not pay the 25% additional charge

I was hoping to pay back 10K and be left to pay the 25% on the remaining 7K but it seems this is not how it works. I have been advised that even if i repay 10K I will still have to pay the 25% on the full 17K and have to claim the relief back in the next accounting period

does anyone know if this is correct?

If I pay the 25% on the 17K this works out to be: 4,250 , however if I only had to pay on the 7K it would be: 1,750

I know that on paying the full loan amount back that I would be able to get it back after my next accounting period, but I would prefer not to do this,

thanks in advance

[northernladuk]

You can't even get it back out next period. It's called bed and breakfasting. If HMRC believe the repayment is a sham to continue the loan they will tax you as if it was income.

Do a search on the forums using the method described in the FAQ and search google to get a full understanding of loans. To take 17k out without understanding what you are sling is just ridiculous.

[JB3000]

Hi everyone,

need some help with a question regarding repaying a directors loan.

My accounting period ended at on the 31st November 2013. My accounts are due at the end of august and I have been advised I have an overdrawn account directors account of 17K

I cant afford to pay the entire amount back and asked my accountant if I could pay back 10K now with the aim of reducing the amount of CT I have to pay. The accountant has advised that I must pay the full 17K in order to not pay the 25% additional charge

I was hoping to pay back 10K and be left to pay the 25% on the remaining 7K but it seems this is not how it works. I have been advised that even if i repay 10K I will still have to pay the 25% on the full 17K and have to claim the relief back in the next accounting period

does anyone know if this is correct?

If I pay the 25% on the 17K this works out to be: 4,250 , however if I only had to pay on the 7K it would be: 1,750

I know that on paying the full loan amount back that I would be able to get it back after my next accounting period, but I would prefer not to do this,

thanks in advance

Your accountant is wrong.

If you repay (or release as dividends) £10k only £7k would become chargeable to S.455 corporation tax, i.e. £7k x 25% = £1.75k.

"However, where the whole or part of a loan or advance is repaid, released or written off, the
company is entitled to relief from the tax chargeable under S455 or a proportionate part of it."

Source:
http://www.hmrc.gov.uk/agents/toolkits/dla.pdf

Point your accountant to the bottom of page 11 of the attached pdf. It is essential that your accountant is following HMRC's director's loan account toolkit and the rules enshrined by Corporation Tax Act 2010.

Please note that you should not take any further loans from the company in the next 30 days as this will cancel the repayment and therefore cancel the corporation tax relief, i.e. bed and breakfasting.

If your accountant fails to comply with the HMRC's director's loan account toolkit, report your accountant to their professional body, inform HMRC that your accountant is not following their tool kits and ask HMRC to investigate all your accountant's clients, make a strongly worded complaint to the director of the firm AND threaten legal action.

You should also ask your accountant to provide you with a schedule (i.e. a list) detailing how your loan account has become overdrawn. Maybe your loan account is overdrawn as a result of your accountant making errors (something that he/she seems to be pretty good at doing). If your accountant fails to comply you know what to threaten him/her with. Also make sure your accountant is charging interest on your overdrawn director's loan account (i.e. you should be paying your company interest in order to prevent you from enjoying the benefit of receiving a tax free loan).

[JB3000]

You can't even get it back out next period. It's called bed and breakfasting. If HMRC believe the repayment is a sham to continue the loan they will tax you as if it was income.

Do a search on the forums using the method described in the FAQ and search google to get a full understanding of loans. To take 17k out without understanding what you are sling is just ridiculous.

The above is a load of old cobblers. Kindly go on a CPD course, please.

[koops]

Your accountant is wrong.

If you repay (or release as dividends) £10k only £7k would become chargeable to S.455 corporation tax, i.e. £7k x 25% = £1.75k.

"However, where the whole or part of a loan or advance is repaid, released or written off, the
company is entitled to relief from the tax chargeable under S455 or a proportionate part of it."

Source:
http://www.hmrc.gov.uk/agents/toolkits/dla.pdf

Point your accountant to the bottom of page 11 of the attached pdf. It is essential that your accountant is following HMRC's director's loan account toolkit and the rules enshrined by Corporation Tax Act 2010.

Please note that you should not take any further loans from the company in the next 30 days as this will cancel the repayment and therefore cancel the corporation tax relief, i.e. bed and breakfasting.

If your accountant fails to comply with the HMRC's director's loan account toolkit, report your accountant to their professional body, inform HMRC that your accountant is not following their tool kits and ask HMRC to investigate all your accountant's clients, make a strongly worded complaint to the director of the firm AND threaten legal action.

You should also ask your accountant to provide you with a schedule (i.e. a list) detailing how your loan account has become overdrawn. Maybe your loan account is overdrawn as a result of your accountant making errors (something that he/she seems to be pretty good at doing). If your accountant fails to comply you know what to threaten him/her with. Also make sure your accountant is charging interest on your overdrawn director's loan account (i.e. you should be paying your company interest in order to prevent you from enjoying the benefit of receiving a tax free loan).

Thanks JB3000, this is really helpful.

I will speak to my accountant again and point him in the direction of the toolkit.

He has also emailed me saying that the only way not to pay the 25% additional charge would be to pay the entire amount of the loan off and making a partial payment would make no difference.... Just doesn't seem right to me

[JB3000]

Thanks JB3000, this is really helpful.

I will speak to my accountant again and point him in the direction of the toolkit.

He has also emailed me saying that the only way not to pay the 25% additional charge would be to pay the entire amount of the loan off and making a partial payment would make no difference.... Just doesn't seem right to me

Thank you for the "thanks"; much appreciated.

[TheCyclingProgrammer]

The above is a load of old cobblers. Kindly go on a CPD course, please.

It is worth bearing in mind that the 30 day bed and breakfasting rule only applies to loans under £15k. For loans above this, HMRC are able to look at subsequent loans beyond the 30 day window and can disallow relief of there is a strong indication it's a continuation of the previous loan and they can show there was in place an intention to take a new loan at the time of the repayment:

http://www.scruttonbland.co.uk/blog-...d-breakfasting

That said, it appears the "intentions and arrangements" rule doesn't apply if you declare a dividend to clear the loan as it gives rise to an income tax charge which is a subtlety of the rule I wasn't aware of until now.

[TheCyclingProgrammer]

He has also emailed me saying that the only way not to pay the 25% additional charge would be to pay the entire amount of the loan off and making a partial payment would make no difference.... Just doesn't seem right to me

It's not, as has been pointed out.

Strictly speaking, yiu are automatically liable to the tax charge on whatever is outstanding at the year end.

However you are entitled to automatic relief in the same year for any amount repaid wihin 9 months after the year end.

You are also entitled to relief an repayments made after this, but not until 9 months after the year in which the repayment was made (i.e. The relief is applied retrospectively and you get a refund).

[RSoles]

The point you may be missing is that the 25% tax is refundable when the loan is repaid.
It's like a surety, and an interest-free loan to HMRC.
You need to pay around 4%IIRC in interest to avoid it being a BIK.