Category: Company loan

As a business owner you can loan your employees up to £10,000 – but what are the tax implications? Find out more below.

Hardship loans to employees

To help employees out during the Covid-19 pandemic, employers may provide ‘hardship’ loans to employees. Where loans are provided, what are the tax implications?

No special rules

There are no special relaxations to deal with loans provided to help employees meet financial obligations during the Covid-19 pandemic; the usual rules for employment related loans apply.

Exemption for small loans

Under the beneficial loan rules, no tax charge arises if the outstanding loan balance does not exceed £10,000 at any point in the tax year. This limit applies to the total of all loans made to the employee, not to each separate loan.

As long as this limit is not exceeded, there is no tax to pay and nothing to report to HMRC.

Taxable loans

If the outstanding loan balance is £10,000 or more at any point in the year, the loan is a taxable cheap loan and the employee is taxed on the benefit of the loan. The amount charged to tax is the difference between the interest payable on the loan at the official rate and the interest, if any, payable by the employee. The official rate of interest is set at 2.25% from 6 April 2020.

Where a loan is taxable, the taxable amount can be worked out on the average loan balance or by reference to the amount outstanding each day if this produces a better result.

The loan must be reported to HMRC on the employee’s P11D, and the taxable amount included in the employer’s Class 1A National Insurance computation.

Where hardship loans are made to employees, ensure that they understand the associated tax implications.

Partner note: ITEPA 2003, Pt. 3. Ch. 7.

Self-employed people and business owners who have received a grant during the coronavirus pandemic need to take these into account when computing your profits for 2020/21. Confused? We explain more here.

Tax implications of Covid-19 support payments

Various support payments are available to individuals and businesses to help mitigate the effects of the Covid-19 pandemic. Are the payments taxable and how should they be treated?

Payments under the Coronavirus Job Retention Scheme?

Grants payments made under the Coronavirus Job Retention Scheme (CJRS) for fully furloughed and flexibly furloughed employees are included in the calculation of the employer’s profits. However, they can deduct payments made to employees and associated employer’s National Insurance and pension contributions.

As far as the employee is concerned, grant payments paid over to them are treated in the same way as normal payments of wages and salary. They are taxable under PAYE and liable to Class 1 National Insurance contributions.

Grants under the Self-employment Income Support Scheme

The self-employed, can, if eligible, claim grants under the Self-employment Income Support Scheme if their business has been adversely affected by the Covid-19 pandemic. The first grant could be claimed in May and the second can be claimed in August.

The grants should be taken into account in computing profits for 2020/21, returned on the self-assessment tax return due by 31 January 2022. As they are included in profits, where these exceed £9,500 for 2020/21, Class 4 National Insurance contributions are payable. If profits exceed £6,475, the trader must also pay Class 2 contributions.

Where profits are below £6,475 for 2020/21, there is no obligation to pay Class 2 contributions. However, it can be beneficial to pay them voluntarily to ensure that 2020/21 remains a qualifying year for state pension and contributory benefit purposes.

Other grants

Various other grants were also paid to particular types of business, such as those eligible for small business rate relief and grants to those in specific sectors, such as those payable to businesses in the hospitality, retail and leisure sectors and to Ofsted registered nurseries.

Where the business operates as a company, the grants should be taken into account in calculating the profits chargeable to corporation tax.

If the grants were payable to a sole trader or unincorporated business, they should be taken into account in computing the profits chargeable to income tax.

Partner note: www.gov.uk/government/consultations/draft-legislation-taxation-of-coronavirus-covid-19-support-payments

 

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Be careful when borrowing money from your company as a director – you might fall foul of the ‘bed and breakfasting’ scenario

Directors’ loans – Beware of ‘bed and breakfasting’

It can make sense financially for directors of personal and family companies to borrow money from the company rather than from a commercial lender. Depending on when in the financial year the loan is taken out, it is possible to borrow up to £10,000 for up to 21 months without any tax consequences. However, if the loan remains outstanding beyond a certain point, tax charges will apply.

Company tax charge

In the event that a loan made to a director of a close company in an accounting period remains outstanding on the date when the corporation tax for that period is due, the company must pay a tax charge (‘section 455 tax’) on the outstanding value of the loan. The trigger date for the charge is the corporation tax due date of nine months and one day after the end of the accounting period. The amount of section 455 tax is 32.5% of loan remaining outstanding on the trigger date.

Traps to avoid

In days of old, it was relatively simple to prevent a section 455 charge from applying by clearing the loan balance just before the trigger date and, if the director still needed the loan, re-borrowing the funds shortly after the trigger date (bed and breakfasting). However, anti-avoidance provisions mean that as a strategy this is no longer effective.

Trap 1 – The 30-day rule

The 30-day rule comes into play where, within a period of 30 days of making a repayment of £5,000 or more, the director re-borrows money from the company. The rule effectively renders the repayment in-effective up to the level of the funds that are re-borrowed. Section 455 tax is charged on the lower of the amount repaid and the funds borrowed within a 30-day window.

Example

John is a director of his personal company J Ltd. The company prepares accounts to 31 January each year. In May 2018, John borrowed £8,000 from the company. On 28 October 2019, he repays the loan with money lent to him by his wife. On 7 November 2019, he re-borrows £7,000 from the company to enable him to pay his wife back. He does not make any further borrowings in November 2019.

Corporation tax for the year to 31 January 2019 is due on 1 November 2019. Although the director’s loan is not outstanding on that date, the 30-day rule bites and only £1,000 of the repayment made on 28 October 2019 is effective — £7,000 of the £8,000 paid back is re-borrowed within 30 days. Consequently, the section 455 charge applies to £7,000 – the lower of the repayment and the funds borrowed within 30-days of the repayment – and the company must pay section 455 tax of £2,275 (32.5% of £7,000).

Avoiding the trap

The 30-day rule can be avoided if the company pays the director a dividend, bonus or any other payment that’s taxable and this is used to repay part or all of a loan. In this situation, it’s OK to take another loan from the company within 30 days without the anti-avoidance rule being triggered. Keeping repayments and re-borrowings below £5,000 will also prevent the 30-day rule from biting.

Trap 2 – Intentions and arrangements rule

The ‘intention and arrangements’ rule applies where the balance of the loan outstanding immediately before the repayment is at least £15,000, and at the time a loan repayment is made there are arrangements, or an intention, to subsequently borrow £5,000.

This rule applies even where the new borrowing is outside 30 days. The rule bites if the repayment is made with the intention of redrawing at least £5,000 of the payment, irrespective of when this is done. Again, the rule does not apply to funds extracted by way of a dividend or bonus as these are within the charge to income tax.

Plan repayments carefully

Where looking to repay loans to prevent a section 455 charge from arising, these should be planned carefully to avoid falling foul of the traps.

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