Inter company loan

[japancool]

If I want to loan one of my companies some money from another of my companies, is there any restriction on doing that? I am the sole director and shareholder of both companies, but they are not related and are in different businesses.

 

[Adauxi]

You need to be very careful about doing this. Both your companies will be close companies and hence caught within the provisions restricting loans to directors (s455). In extremis, you can be liable to pay a 25% surcharge to HMRC, although this can be refunded if the loan is subsequently repaid.

If you wish to avoid these provisions, you could issue redeemable shares or you could pay a dividend (you may need to issue a new class of share from the paying company to the recipient company first)

 

[David Griffiths]

But the proposal is not a loan to a director. It is for a loan from one company to another. Why do you think that S455 is relevant in those circumstances?

In my opinion there is no issue with doing this. One thing to be aware of is if the debt turns bad, the lending company will not be able to claim bad debt relief.

 

[Adauxi]

The recipient company is an associate of the participator. Loans to participators and their associates are caught within the scope of s455 - see hmrc.gov.uk/manuals/ctmanual/CTM61505.htm

 

[AndyM83]

hmrc. gov.uk/budget2013/tiin-5120.pdf (can't post urls yet)

Are you sure 'participators and associates' applies to companies? From what I've read, it applies to individuals only.

 

[Caspar]

I disagree regarding it being a directors loan - in my opinion it is not, and I deal with this sort of thing all the time.

It is an inter-company loan to be set up on the balance sheet as such. And has nothing to do with directors loan. Company A has made a loan to compant B, Company B has utilised the money and it would only form part of Directors loan if the Director took the money out of company B for his personal use afterwards.

A note should however be put in the accounts about 'connected parties.'

Caspar

 

[teddys]

It will be treated as a loan to the participator and a s.455 charge will apply provided the loan exceeds £5k etc

 

[japancool]

It won't be in excess of £5k, not even close so that shouldn't apply in this case, I think?

 

[teddys]

Then it should be fine provided loans made whether directly or indirectly to yourself do not exceed the limit. And for those interested in the technical details of 'directors' loan' have a read of our blog post here

 

[japancool]

Thank you teddys, very useful. With a bit of luck, it'll only be a very short term loan anyway and will be paid back within a couple of months.

 

[David Griffiths]

It will be treated as a loan to the participator and a s.455 charge will apply provided the loan exceeds £5k etc

Can you clarify two points, please?

1) S455 apples to loans made by participators and their associates. Where in the legislation does it say that a company can be an associate? That relationship isn't covered in S448 or in the HMRC manual page on the topic. Presumably this is stated elsewhere?

2) I can't see any reference to a £5,000 limiit to the s455 charge, or the exceptions in s456. Can you point me to the relevant link, please?

 

[Caspar]

Please listen to Dave and myself. It is not a directors loan. Company A and Company B are separate entities. This has nothing to do with Directors Loan accounts. All that is necessary is that a note be put in the accounts about connected parties. To people who deal with this for a living, it is as clear as 1+1 = 2. The comment about it being Directors Loan does not make any sense at all. As the Director has not taken the money out and spent it on himself. The money has gone to another company (entity) and the other company will be spending the money on company expenditure (wholly and exclusively for business use).

 

[japancool]

Please listen to Dave and myself. It is not a directors loan. Company A and Company B are separate entities. This has nothing to do with Directors Loan accounts. All that is necessary is that a note be put in the accounts about connected parties. To people who deal with this for a living, it is as clear as 1+1 = 2. The comment about it being Directors Loan does not make any sense at all. As the Director has not taken the money out and spent it on himself. The money has gone to another company (entity) and the other company will be spending the money on company expenditure (wholly and exclusively for business use).

OK, this makes a lot of sense. I've read through the article teddys posted earlier again, and it's talking about monies loaned by and repaid to the director. This is not a personal loan by me, it is a company-to-company loan, although I am the authorising party in both cases. I'm not spending money on behalf of the company, and neither is the company paying any expenses on my behalf.

The loan is for stock, and as such, entirely a business expense.

 

[teddys]

Can you clarify two points, please?

1) S455 apples to loans made by participators and their associates. Where in the legislation does it say that a company can be an associate? That relationship isn't covered in S448 or in the HMRC manual page on the topic. Presumably this is stated elsewhere?

2) I can't see any reference to a £5,000 limiit to the s455 charge, or the exceptions in s456. Can you point me to the relevant link, please?

Stuck with some VAT issues: will answer this later today!!

 

[teddys]

Can you clarify two points, please?

1) S455 apples to loans made by participators and their associates. Where in the legislation does it say that a company can be an associate? That relationship isn't covered in S448 or in the HMRC manual page on the topic. Presumably this is stated elsewhere?

2) I can't see any reference to a £5,000 limiit to the s455 charge, or the exceptions in s456. Can you point me to the relevant link, please?

OK so you’re focusing on a badly constructed sentence written early in the morning despite the fact that the link to the blog clearly explains the legislation that existed up until FA 2013!

And to reply:
S.448 doesn’t need to include a company within its definition. In fact there is no need to include it anywhere in the legislation! Even the definition of ‘control’ (s.450) doesn’t include ‘common control’ (unlike in the accounting standards, and hence the disclosure requirements). It’s pretty simple – the company receiving the money (being a company) too needs to survive the s.455 test before it can pass money on to its participators!

However, given the FA2013 focus on loans through ‘intermediaries’ and also given s464A which deals with arrangements conferring benefits on the participator whether directly or indirectly, I’m tempted to consider company to company loans to fall within a s.455 charge unless

-It was a loan made in the ordinary course of business or

-The participator has not directly or indirectly benefited from it

None of the above was clear from the original post

£5,000 is within the ITEPA provisions, and you can see it now under the new 464C

 

[japancool]

It’s pretty simple – the company receiving the money (being a company) too needs to survive the s.455 test before it can pass money on to its participators!

The recipient company isn't passing the money on to any participator, unless the term participator means a supplier?

However, given the FA2013 focus on loans through ‘intermediaries’ and also given s464A which deals with arrangements conferring benefits on the participator whether directly or indirectly, I’m tempted to consider company to company loans to fall within a s.455 charge unless

But the loan is not being made through any intermediary. It's a direct company-to-company loan. And given that the loan is being used for purely business expenses, I don't see how it can be considered to benefit me directly or indirectly.

 

[Caspar]

The recipient company isn't passing the money on to any participator, unless the term participator means a supplier?

But the loan is not being made through any intermediary. It's a direct company-to-company loan. And given that the loan is being used for purely business expenses, I don't see how it can be considered to benefit me directly or indirectly.

As I have said just listen to Dave and I. The two of us are of the same opinion and I certainly have experience in interco accounts. Even you are making more sense in your summing up of the facts.

 

[japancool]

As I have said just listen to Dave and I. The two of us are of the same opinion and I certainly have experience in interco accounts. Even you are making more sense in your summing up of the facts.

I think teddys thinks the loan is being made to company B so that company B can cover some personal expenditure on my behalf, but it isn't. It's for expenses wholly incurred by company B in the course of business, so I'm with you and Dave on this one.