Corrigan & Co Ltd Accountants and Tax Consultants

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1 Corrigan & Co Ltd Accountants and Tax Consultants Eamonn Corrigan BA (Hons) ACMA, CGMA Clare Jones BA (Hons) ACCA Unit 9 Enniskillen Business Centre 21 Lackaghboy Road Enniskillen Co. Fermanagh BT74 4RL t: (028) f: (028) e: [email protected] Dear Client Directors' loan accounts and Corporation Tax explained If you're a company director or 'participator' and take money out of your company that's not a salary or a dividend - over and above any money you've put in - you're classed as having received the benefit of a director's loan. If your director's loan account is overdrawn, your company must pay tax on any amount you've not repaid by nine months after the end of your Corporation Tax accounting period. This guide explains what a director's loan is and the Corporation Tax implications for your company. It tells you if or when you need to inform HM Revenue & Customs (HMRC) that a director's loan exists and explains what entries you need to include in your Company Tax Return to account for any tax that's due. It also mentions possible Income Tax implications of directors' loans for you and your company. What is a director's loan account If you're self-employed you can take business money out of your bank account at any time and use it as your own. The money is yours whether it's from a separate business account or from a combined business-personal account. However, if you're a company director (or other participator of a close company) and take money out of the business over and above any money you've put in, and that money is not a salary or a dividend, then the money is not yours - it belongs to the company. You've received the benefit of a director's loan from your 'director's loan account'. This loan is sometimes known to HMRC as a 'loan to participators'. What is a participator in a close company HMRC defines a participator as a person who has a share or 'interest' in a company. A participator is usually a shareholder who could also be a director. A participator includes any 'associate' - for example, spouse or civil partner, business partner, relative, trustee, or a loan creditor. A participator's interest in a company can be in its capital (for example shares) and/or in the income of the company.

2 HMRC defines a 'close company' for Corporation Tax purposes as a company that is controlled directly or indirectly by five or fewer participators - or any number of participators if they are all directors. Please note that these are not necessarily the same definitions used by other HMRC tax areas (for example VAT), other government agencies (for example Companies House), or various accounting conventions used to prepare audited accounts. How a director's loan account works A director's loan account can in practice be any form of account or bookkeeping entry - for example a loan account or a current account - or simply the fact that you have taken money out. If your company has other directors who use a directors' loan account, you must keep separate company records for each loan account your company operates. As a director of a company, you must manage your director's loan account carefully, making sure you include all entries accurately and on time. HMRC may make enquiries about your director's loan account as part of any Corporation Tax compliance check. You lend money to your company: director's loan account in credit If you lend your company money (for example by paying money into your company's bank account as opposed to, say, buying shares) your director's loan account is in credit. You can draw some or all of this money out at any time. There are no tax implications for your Company Tax Return. Your company lends money to you: director's loan account in debit or overdrawn If you take money out of your company's bank account over and above money you've loaned to the company - and that money is not a salary or a dividend - then it's a loan from the company to you. Your director's loan account is overdrawn. HMRC considers any such loan or advance drawn out of the business as a director's loan whether or not you have set up any type of account in the company's books. A director's loan account can include: cash payments other than your salary or dividend expenses that you may have paid for using company funds that are actually for personal use money withdrawn for your personal use - for example, to renovate your home, pay school fees or personal Income Tax Your company's accountant or auditor will normally transfer any such expenditure identified as personal from company expenditure to your director's loan account.

3 What is not a director's loan for Corporation Tax purposes The following are not generally considered to be director's loans for HMRC Corporation Tax purposes: certain small loans made to participators who are full-time working directors who do not have a material interest in the company loans made to participators for the supply of goods or services in the ordinary course of business, providing that your company doesn't give more than six months credit or longer credit than it would normally give to customers Paying off a director's loan A director's loan can be repaid by: putting money into the company's bank account the company crediting the director's loan account with a payment - for example a dividend, salary or bonus A director's loan can also be considered repaid if the loan is: released by the company in a formal contractual procedure written off by the company where the company accepts that a loan (usually to a former director) cannot be recovered, and has given up trying to get it repaid Corporation Tax implications of overdrawn directors' loan accounts Whether your company has to tell HMRC that your director's loan exists - and pay tax on the outstanding loan amount - depends on when the loan is repaid. Strictly speaking this tax is not Corporation Tax. But in practice, you calculate the tax on your overdrawn loan on your Company Tax Return and add it to the Corporation Tax that's due. The section below shows you how to do this. Your director's loan account is paid off by the end of your company's accounting period If you pay off your director's loan in full by the last day of your company's Corporation Tax accounting period: your company does not pay Corporation Tax on the loan you don't need to tell HMRC about the loan on your Company Tax Return For example, your company's accounting period runs from 1 April 2012 to 31 March 2013, and you pay off your director's loan account on 30 March You don't need to include any information about this loan on your Company Tax Return.

4 Your director's loan account is paid off within nine months and one day of the end of your company's accounting period If your director's loan account is overdrawn after the last day of your company's Corporation Tax accounting period but you repay it in full within nine months: your company does not pay tax on the loan you must include details of that loan in your Company Tax Return For example, your accounting period runs from 1 April 2012 to 31 March You pay off your director's loan account on 30 September You need to include information about this loan on your Company Tax Return but you will not need to pay any tax on the loan. Your director's loan account is not paid off within nine months and one day of the company's year-end If your director's loan account is not paid off in full within nine months after the end of your company's accounting period: You must include details of the loan in your Company Tax Return. Your company must pay Corporation Tax on the loan - the current tax rate for directors' loans is 25 per cent of the loan. HMRC will charge interest on the amount unpaid - interest runs from the normal payment date for the accounting period in which the loan was made, to the earlier of the date the tax is paid or the date the loan is repaid. This interest is not repayable. For example, your company's accounting period runs from 1 April 2012 to 31 March Your director's loan account is overdrawn by 10,000 on 1 January You need to include information about this loan on your Company Tax Return. You should add 2,500 ( 10,000 25%) to how much Corporation Tax you must pay. As you are including the tax due on your directors' loans as part of your company's 'self assessment' of the tax it has to pay, you can't appeal against the amount that's due or ask HMRC to postpone collection of it. How to account for directors' loans on your Company Tax Return First you fill in the Directors' loans section on your online CT600 form. This is the equivalent of the paper return supplementary page CT600A (Loans to Participators by Close Companies). In this section you disclose any relevant directors' loans and calculate the tax due, if any, on the loan(s). You then enter the amount of tax payable in Box A13 on to your online CT600 Company Tax Return form in Box 79, and put an entry in Box 80. Your software package may do these calculations or carry forward your entries for you. Box 79 'Tax payable under S419 ICTA 1988' refers to the Income and Corporation Taxes Act 1988 Section the legislation that covers tax on directors' loans. This legislation has now been replaced by Section 455 of the Corporation Tax Act 2010.

5 Claiming relief after your directors' loan has been repaid When you pay off a director's loan on which your company has paid Corporation Tax, your company can reclaim that amount of Corporation Tax paid. HMRC calls this 'claiming relief from the tax paid'. When you can reclaim the Corporation Tax Your company can reclaim any Corporation Tax paid nine months after the end of the accounting period in which the loan was paid off (or released or written off). However, the claim must be made within four years from the end of the financial year in which the loan is repaid (or released or written off). Example Your company's accounting period ended on 31 March Your company paid Corporation Tax of 2,500 on a 10,000 loan that was still outstanding on 1 January You repay this loan in full to your company on 1 March 2015 (financial year ending 31 March 2015). You can reclaim this Corporation Tax any time after 31 December Your claim must be made by 31 March For claims made up to 31 March 2010 a different time limit applied. Claims for those periods could be made up to six years from the end of the financial year in which the repayment was made. How to reclaim the Corporation Tax You do this on your Company Tax Return by filling in the relevant boxes on the directors' loans online section and informing HMRC you have paid off the director's loan. How you do this depends on timing: if your claim is made within 24 months of the end of that accounting period you can amend and resubmit an amended Company Tax Return for that previous accounting period if your claim is made more than 24 months after the end of the previous accounting period you can make a separate claim by writing to HMRC at the same time as you file your Company Tax Return for your most recent accounting period Making a claim that reduces your company s Corporation Tax liability If you are making a claim in your return that reduces your company s Corporation Tax liability for an earlier period you must make sure you have put an X in the appropriate box on the CT600 form. This will alert HMRC to your claim and they can process it correctly.

6 Other tax implications of directors' loans Overdrawn directors' loan accounts If your director's loan account is overdrawn there may also be Income Tax and National Insurance implications for you and for your company. Directors' loan accounts in credit If your company pays you interest on your director's loan, there are Income Tax implications for you and your company. You must show the interest you've received as income on your Income Tax Self Assessment tax return. Your company must pay this interest to you only after withholding Income Tax at the basic rate - currently 20 per cent. Your company must disclose these interest payments it has made to you and pay the Income Tax that it has collected to HMRC. You should use form CT61 to do this. You can order form CT61 online. Directors' loans that are written off or released Where your director's loan is released or written off by your company, rather than being repaid, the amount released or written off is treated as your personal income. It's treated as net income received after the deduction of tax. If you pay tax at the basic rate, you won't have to pay any additional tax, but if you're liable at higher rates of tax then you'll have to pay the difference. You'll also have to pay any National Insurance contributions that are due. For help on the above please contact Eamonn at