In a recent Tax Tribunal case the judge agreed with HMRC that a detailed breakdown of director loan account transactions is required, including dates.
The significance is that where the loan account is overdrawn (debit balance) there may be a possible P11D benefit on the director and also a tax charge on the company.
A taxable benefit in kind would arise where the loan exceeds £10,000 at any point during the tax year and the interest paid to the company by the director is less than the HMRC official rate, currently 2.5%. If the overdrawn loan does exceed £10,000 during the year, even for a short time only, you will need to charge interest at the official rate for the whole time the loan is overdrawn by any amount during the year. If the taxable benefit does arise tax will be payable by the director at their top rate of income tax plus class 1A national insurance of 13.8% will be payable by the company.
In addition, if the director is also a shareholder of a close company or he is connected with a shareholder, there is a 32.5% tax charge payable by the company making the loan. That amount is based on the loan balance at the year end and only arises where the loan is still outstanding 9 months after the end of the accounting period. It is payable 9 months and a day after the accounting period end, on the same date as the corporation tax liability becomes due.
When the loan is repaid to the company by the director there will be a refund to the company by HMRC of the tax previously paid, but not until 9 months and a day after the end of the accounting period in which the loan is repaid. Furthermore there is no system for reclaiming the tax, you need to write a letter to HMRC – but not until just before the refundable date or they’ll send it back and make you resend it at a later date!
If the director does pay benefit tax on the overdrawn loan that will not be repayable when the loan is repaid.
Thus, you can see why HMRC may require a detailed analysis of transactions between the director and the company.
Note that there is anti-avoidance legislation in place to catch the situation where the loan is repaid by the director to the company and a similar amount withdrawn within a 30 day period. The tax legislation matches the repayment with the new “loan” and consequently the original loan would still be outstanding.
If you would like further advice on overdrawn director loan accounts contact Jan Friend
The content in this blog is correct as at 07/11/2019. See terms and conditions.