Contractors' Questions: How to take a director's loan?

Contractor's Question: I own a limited company which has had a pretty stable turnover and profit since its inception about five years ago. However, following a tough few months financially, I am facing considerable expense in the coming months, mostly related to business. I'd therefore like to take an interest-free loan from the business, but how do I ensure it is legal?

Expert's Answer: In answering your question I am making a couple of likely assumptions, namely that you are the majority shareholder and a director of this UK limited liability company and that the loan is a genuine loan, as opposed to a payment on account of remuneration. With the changes brought about by the Companies Act 2006, it is now possible for a director to take a loan from a company, provided that you obtain shareholder approval and follow the statutory procedure. For tax purposes, there are a couple of considerations.

1. If the interest-rate on the loan is less than the official rate (currently 4% per annum) then you will have a taxable benefit of a taxable cheap loan. The amount of the loan and the benefit to you will need to be reported on your P11D each year.

2. Loans to participators in close companies also have tax implications. A close company is one that is controlled by five or fewer people (the participators) or its directors (also participators). Where these conditions are met then loans to participators that are outstanding at a date nine months after the year end are subject to a 25% notional corporation tax. This tax is due nine months after the company’s year end and is repayable nine months after the year end in which the loan is repaid.

Loans from a company can be an efficient way to utilise cash, but you must be aware of the tax consequences.

The expert was Paul Spindler, partner within the technology group at Kingston Smith LLP.

Friday 8th Oct 2010