From 6 April 2016, companies will be charged a higher rate of tax (payable under s.455 CTA 2010) on outstanding loans to directors, or any other participator in a close company. This new rate is 32.5%, (up from 25%) and is payable by the company on unpaid balances existing nine months after the end of the accounting period. The new rate of 32.5% applies to transactions from 6 April 2016. Existing loans in place at this date will still be subject to the 25% rate.
Income tax & NIC
Where a director has an unpaid interest-free loan 9 months after the year end, the director is in receipt of a taxable benefit which must be reported on the P11D. Such an amount is not covered by a P11D dispensation and the individual is taxed on the amount of benefit received.
The company is subject to Class 1A NIC on the beneficial loan interest and should report this on the P11D (b).
Paying an HMRC official rate of interest
Where a director pays interest at HMRC’s official rate, there is no taxable benefit and the reporting requirements are reduced.
Tax avoidance measures
The government has put in measures to tackle tax avoidance on ‘close company loans’. Where a loan is repaid within the 9 month timeframe, then another loan taken out shortly after, the individual is assessed as if the loan had never been repaid. This concept was known as ‘bed and breakfasting’.
It is worth calculating if it is cheaper for the director to pay tax on the beneficial loan (and the company pay the associated Class 1A NIC), or the director pays interest on the loan at the HMRC official rate. The director’s marginal tax rate will play an important role in determining which is the most preferable scenario all round.
What happens when the loan is repaid?
The company receives back the s.455 tax it originally paid, in full or in part, depending on how much of the loan has been repaid. This tax is repayable 9 months and a day after the end of the accounting period in which the repayment is made.
How we can help you
There are several other factors to consider in order to achieve a tax efficient outcome which also suits the commercial and practical objectives of the loan. We can offer bespoke tax planning advice based on your requirements and for further information, please contact Julia Whelan on 01527 558539 or email [email protected].