Directors loan tax

[Michael14]

Hello, I looked into directors loans on HMRC but I am not sure that there was any info on loans that are interest free and repaid before end of the tax year.

Can you please let me know what are the implications if company lends interest free loan to director and director repays it back before company ends it's year and before SA302 year end date?

For example, company gives loan in June, it is interest free and repaid in September, company accounts are 1.1. until 31.12.

Are there any taxes in this case?

 

[NicoJ]

If the loan was over £10,000 at any time then you need to report a BIK on aform P11d. There will be no S455 as the loan has been repaid.

 

[MyAccountantOnline]

Hello, I looked into directors loans on HMRC but I am not sure that there was any info on loans that are interest free and repaid before end of the tax year.

Can you please let me know what are the implications if company lends interest free loan to director and director repays it back before company ends it's year and before SA302 year end date?

For example, company gives loan in June, it is interest free and repaid in September, company accounts are 1.1. until 31.12.

Are there any taxes in this case?

It depends how much the loan was.

Have a read here https://www.gov.uk/directors-loans/you-owe-your-company-money

 

[Michael14]

Thank you for responses. I checked out the link, and saw that if I repay it quickly I have no personal responsibility, however I unfortunately do not understand regarding the company.

Unfortunately, as mentioned in my original post, this again mentions if loan has been repaid after the corporation tax period, and all cases are only after the period ended. It doesn't say what happens if it is repaid before corporation tax period ends.

Therefore, could someone please clarify this scenario:

Company accounts period: 1.1.xxxx until 31.12.xxxx

Company pays Director's loan to Director (who is also majority shareholder) on 1.5.2022.
Loan amount is 50,000gbp, no interest.
Director repays the loan one month later, so loan is repaid on 1.6.2022.
At the end of the financial year (31.12.2022) there is no loan to Director in the books since this has been repaid in June.

Would there be any tax for either director or the company?

 

[NicoJ]

Thank you for responses. I checked out the link, and saw that if I repay it quickly I have no personal responsibility, however I unfortunately do not understand regarding the company.

Unfortunately, as mentioned in my original post, this again mentions if loan has been repaid after the corporation tax period, and all cases are only after the period ended. It doesn't say what happens if it is repaid before corporation tax period ends.

Therefore, could someone please clarify this scenario:

Company accounts period: 1.1.xxxx until 31.12.xxxx

Company pays Director's loan to Director (who is also majority shareholder) on 1.5.2022.
Loan amount is 50,000gbp, no interest.
Director repays the loan one month later, so loan is repaid on 1.6.2022.
At the end of the financial year (31.12.2022) there is no loan to Director in the books since this has been repaid in June.

Would there be any tax for either director or the company?

Exactly the same answer as my previous post.
There will be a BIK as the amount is over £10k. You will incur tax and the company will pay Class 1a NIC.
There will be no S455.

 

[Michael14]

Ok, I was expecting it to be tax free, but I guess my expectations were wrong. And how would HMRC know about the loan when no party had any benefit of it and it is not shown in the accounts? Basically neither company nor Director made any "winnings" from this so why is it taxable?

 

[NicoJ]

Ok, I was expecting it to be tax free, but I guess my expectations were wrong. And how would HMRC know about the loan when no party had any benefit of it and it is not shown in the accounts? Basically neither company nor Director made any "winnings" from this so why is it taxable?

You have had the benefit of an interest free loan by virtue of your position in your company. HMRC consider the interest you've effectively saved to be taxable income.

How would HMRC know? Its self assessment so they wouldn't know unless they investigated the company or you. It would be a small amount of tax to pay, rather than the risk of penalties if HMRC did find out.

 

[Financial-Modeller]

You have kind of answered your own question there!

The accountants have provided the absolutely correct answer.

You rightly point out that if there is no evidence of the loan in the accounts, there is no reason HMRC would be aware of the loan or any BiK liability.

Building on the previous point, do you want to get into a lengthy discussion on this with HMRC in the (probably unlikely) event of an inspection of the accounts?

 

[Financial-Modeller]

Ok, I was expecting it to be tax free, but I guess my expectations were wrong. And how would HMRC know about the loan when no party had any benefit of it and it is not shown in the accounts? Basically neither company nor Director made any "winnings" from this so why is it taxable?

You have kind of answered your own question there!

The accountants have provided the absolutely correct answer.

You rightly point out that if there is no evidence of the loan in the accounts, there is no reason HMRC would be aware of the loan or any BiK tax liability.

Building on the previous point, do you want to get into a lengthy discussion on this with HMRC in the (probably unlikely) event of an inspection of the accounts?

 

[UK Contractor Accountant]

why would the loan not be shown in the statutory accounts?

Transactions with Directors disclosable - Information about directors’ benefits: advances, credit and guarantees are mandatory.

 

[Elliot Green]

The fact that HMRC *might* not become aware of the position because of how the accounts have been prepared is merely only one side of the coin. It is the duty of the taxpayer to come clean to HMRC because the regime that operates is *self* assessment; the default position is not HMRC assessment.

In the case of Nicholson v Morris (H M Inspector of Taxes) 51 TC 95 the following was broadcast:

"It is the taxpayer who knows and the taxpayer who is in a position (or, if not in a position, who certainly should be in a position) to provide the right answer, and chapter and verse for the right answer, and it is idle for any taxpayer to say to the Revenue, “Hidden somewhere in your vaults are the right answers: go thou and dig them out of the vaults.” That is not a duty on the Revenue…It is the duty of every individual taxpayer to make his own return and, if challenged, to support the return he has made, or, if that return cannot be supported, to come completely clean…"

If you do not come clean then if and when a tax insufficiency is discovered in a tax return, the conduct could be considered *deliberate* and that could lead to what is called a Discovery Assessment. Along with that an HMRC tax penalty of up to 100% of the tax insufficiency can easily sprout. This appears a classic example of what is cheap can later be very expensive.