Directors Loan Repayment / Tax implications

[RSmith2.]

Recently setup a limited company and loaned (interest-free) money to it to cover start up costs like the purchasing of a van. I believe that the company can repay me any amount (up to the loan value) at any time without tax implications for either the company or myself but I would like to understand why this is the case. If it weren't for the existence of the director's loan and repaying it (which is planned on a weekly basis as quickly as possible, using earnings) then that money would be left in the business account and surely considered a company profit and therefore subject to corporation tax. Perhaps it doesn't matter, I'd just like to understand the difference and to be sure neither the company or me will incur costs as a result of loan repayment.

 

[DontAsk]

A loan from a director does might allow the company to perform trading activity(e.g. buying stock to generate profit but it does not directly contribute to profit.

You need to talk to your accountant and understand balance sheets and profit and loss accounts.

 

[Scalloway]

The company wouldn't pay tax on it if it was a loan from the bank. The same principal applies.

 

[David Griffiths]

There seems to be a suggestion in the OP that repaying the directors loan will reduce the corporation tax liability of the company. That is definitely not the case. There are no tax consequences either way when money is loaned TO a company by a director, and subsequenly REPAID to that director.

The same cannot be said in the case where the money is loaned BY the company

 

[MyAccountantOnline]

Recently setup a limited company and loaned (interest-free) money to it to cover start up costs like the purchasing of a van. I believe that the company can repay me any amount (up to the loan value) at any time without tax implications for either the company or myself but I would like to understand why this is the case. If it weren't for the existence of the director's loan and repaying it (which is planned on a weekly basis as quickly as possible, using earnings) then that money would be left in the business account and surely considered a company profit and therefore subject to corporation tax. Perhaps it doesn't matter, I'd just like to understand the difference and to be sure neither the company or me will incur costs as a result of loan repayment.

A company pays tax on its profits not what is in its bank account. It could for example make a profit and have tax to pay and have nothing in its bank account.

Profit is sales and other taxable income less business expenses, loans received aren't income and loans repaid aren't business expenses, it's only loan interest which can be income or expenses.

When a director lends money to his/her company it may increase the bank balance but its not taxable income and the same applies when the company repays the director it reduces the cash in the bank but doesn't affect Corporation tax.

The only time it will affect Corporation tax is if the director charges the company interest on the loan, and depending on the amount involved, if the directors loan becomes overdrawn ie the director owes money to the company.

 

[Elliot Green]

Money in a company bank account is not profit if it originated from a director loan. There was no sale arising. It is simply loaned monies, not a trading action per se. As a result it doesn't ordinarily give rise to tax consequences as it is now a company liability. Obtaining specific accountancy advice on your facts would appear beneficial.

 

[Lisa Thomas]

Definitely hire an accountant to help you. Speak to the ones who have taken time out to reply to your query.

 

[RSmith2.]

Thanks all for your responses. I have since come to understand the advice given. I was just finding it hard to find guidance on directors loans resulting from a loan to the company. Much of the readily available information is about taking a loan from the company. I was indeed conflating money in the bank with revenue and profit. I also confused myself regarding the repayment/expense side of it. I was looking at the cashflow of repaying myself and then wondering how this was tax deductible when a repayment isn't an expense. I was focusing on day to day transactions/cash flow rather than a profit and loss for the whole accounting period. In my head the expense was the loan repayment, when actually (I think I'm right in saying this) that the expenses to be listed are the things I bought using the loaned monies. My calculations work out the same, I was just looking at it the wrong way and overthinking it. That's what you get for trying to figure out new things when you're sleep deprived!

 

[Tables Force]

There seems to be a suggestion in the OP that repaying the directors loan will reduce the corporation tax liability of the company. That is definitely not the case. There are no tax consequences either way when money is loaned TO a company by a director, and subsequenly REPAID to that director.

The same cannot be said in the case where the money is loaned BY the company

When the company is the one lending the money, would it actually change the company's tax liability?

Surely it is the director's personal liability which will/could be affected.

 

[David Griffiths]

When the company is the one lending the money, would it actually change the company's tax liability?

Surely it is the director's personal liability which will/could be affected.

If there is an overdrawn director's loan account, liability to tax arises initially on the company under S455. It's possible that the liability will be wiped out on the repayment of the loan.

The director may also have a personal tax liability on the benefit in kind

 

[Elliot Green]

When the company is the one lending the money, would it actually change the company's tax liability?

Surely it is the director's personal liability which will/could be affected.

No. Section 455 tax is a company tax liability that arises on an overdrawn director's loan account that isn't repaid within 9 months and one day of the year end usually.

 

[Bobbo]

when actually (I think I'm right in saying this) that the expenses to be listed are the things I bought using the loaned monies.

Yes, except when there are specific rules for certain kinds of expenditure, like purchasing a van.

 

[Elliot Green]

Yes, except when there are specific rules for certain kinds of expenditure, like purchasing a van.

There do not appear to be specific rules about repayment of a director's loan from a company, simply because the money loaned by the director to the company was used to purchase a van.

 

[Bobbo]

There do not appear to be specific rules about repayment of a director's loan from a company, simply because the money loaned by the director to the company was used to purchase a van.

I meant in terms of the treatment of the cost by the company "expenses to be listed" - see the part of OP's comment I quoted.

I.e. purchasing a van isn't counted as an 'expense' and put through the P&L like other costs would be.

 

[Elliot Green]

I meant in terms of the treatment of the cost by the company "expenses to be listed" - see the part of OP's comment I quoted.

I.e. purchasing a van isn't counted as an 'expense' and put through the P&L like other costs would be.

A van purchased by a company is not an expense; it is an asset on the balance sheet.

The running of a company van will result in expenses being incurred such as fuel, insurance etc. Those will appear in the profit and loss account.

There will also be depreciation that reduces the balance sheet value as time goes on and capital allowances from the tax perspective.

 

[RSmith2.]

A van purchased by a company is not an expense; it is an asset on the balance sheet.

The running of a company van will result in expenses being incurred such as fuel, insurance etc. Those will appear in the profit and loss account.

There will also be depreciation that reduces the balance sheet value as time goes on and capital allowances from the tax perspective.

Thank you. The way I've come to understand this from a P&L point of view is revenue minus day to day expenses, minus capital allowance (van) = net profit, which is used to calculate corporation tax. Does that sound right?

 

[Elliot Green]

Thank you. The way I've come to understand this from a P&L point of view is revenue minus day to day expenses, minus capital allowance (van) = net profit, which is used to calculate corporation tax. Does that sound right?

You probably need an accountant to assist further.

 

[elaine@cheapaccounting]

Thank you. The way I've come to understand this from a P&L point of view is revenue minus day to day expenses, minus capital allowance (van) = net profit, which is used to calculate corporation tax. Does that sound right?

Kind of .....

There's profit in the accounts which is adjusted (e.g. add back depreciation and deduct capital and annual allowances plus other things like disallowable expenses e.g. entertaining) to arrive at profits subject to corporation tax.

That's done "behind the scenes" in the tax computation which support the Corporation Tax Return. It's not something you will see in a set of accounts.

That's the accounting magic! And generally why it takes at least 3 years to pass accountancy exams - tax is taxing!

The basics of bookkeeping and accounting are pretty easy especially with the systems, tools and tech around these days to help.

The crux comes in making sure all of the rules have been followed which change each year. A good accountant keeps clients compliant.

The best advice I can give to anyone in business (especially operating via a limited company which is more complex) is to get advice BEFORE you do something as the past cannot be changed

Good luck

 

[DontAsk]

Kind of .....

There's profit in the accounts which is adjusted (e.g. add back depreciation and deduct capital and annual allowances plus other things like disallowable expenses e.g. entertaining) to arrive at profits subject to corporation tax.

That's done "behind the scenes" in the tax computation which support the Corporation Tax Return. It's not something you will see in a set of accounts.

This happens with amortisation of goodwill in my accounts and it's clear from the accounts (prepared by my accountant) what is happening.

Otherwise, the accounts would make no sense, at least not to me. I like to know what's going on and where all the calculations come from.

 

[RSmith2.]

Kind of .....

There's profit in the accounts which is adjusted (e.g. add back depreciation and deduct capital and annual allowances plus other things like disallowable expenses e.g. entertaining) to arrive at profits subject to corporation tax.

That's done "behind the scenes" in the tax computation which support the Corporation Tax Return. It's not something you will see in a set of accounts.

That's the accounting magic! And generally why it takes at least 3 years to pass accountancy exams - tax is taxing!

The basics of bookkeeping and accounting are pretty easy especially with the systems, tools and tech around these days to help.

The crux comes in making sure all of the rules have been followed which change each year. A good accountant keeps clients compliant.

The best advice I can give to anyone in business (especially operating via a limited company which is more complex) is to get advice BEFORE you do something as the past cannot be changed

Good luck

Thank you. We have a very good accountant, who has helped set everything up. I trust them wholeheartedly. I've just been trying to do my own research and learning so that I can understand how it all works, without bombarding them with infinite questions while they're so busy getting us up and running.

 

[elaine@cheapaccounting]

Thank you. We have a very good accountant, who has helped set everything up. I trust them wholeheartedly. I've just been trying to do my own research and learning so that I can understand how it all works, without bombarding them with infinite questions while they're so busy getting us up and running.

I’m sure they won’t mind lots of questions. It’s expected when people start out in business. Generally the more we can educate clients at the outset the better the ongoing relationship and client experience is throughout. Good luck.