Your director’s loan – HMRC trap or tax advantage?

Thinking about taking cash from your business bank account to help pay personal bills? Be careful, HMRC often rules that this type of ‘borrowing’ should be treated as salary and subject to tax and national insurance contributions. Read on to find out more.

If you’ve ever used money from your business bank account to pay for a personal purchase e.g. home improvements or buying a new car, then your accountant may have reported this arrangement as a director’s loan, stated as a taxable benefit in kind on your company year-end accounts. You’d be forgiven for thinking that this would be acceptable as long as you’ve:

  • declared the amount on a P11D form
  • shown the amount on your personal tax return; and
  • repaid it during the same tax year and within a reasonable time of the company’s tax year ending.

I’ve paid my director’s loan back, so what’s the problem?

Unfortunately, HMRC doesn’t always see it this way, and suggests that any money (no matter the amount) taken from the business for personal gain should be treated as additional salary and accounted for through PAYE and national insurance contributions. As you can imagine this could result in a fairly hefty tax bill, depending on how much was ‘borrowed’ in the first place.

What happens if they dispute my director’s loan?

The tax man could start an enquiry and issue a demand for payment for the PAYE and NI owed on the additional portion of salary. Their reasoning is that payments made to, or on behalf of, a director by the company that can be viewed as ‘money or money’s worth’ should be treated as pay and taxed accordingly.

You could appeal HMRC’s decision, however official legislation backs up the HMRC view, and makes it very difficult to argue with their ruling.

If HMRC does suggest that personal bill payments made by the company on your behalf are subject to PAYE and NI, you can try referring them to the HMRC guide for employers, which states that such an arrangement is a benefit in kind and not subject to PAYE. Unfortunately though, the amount still counts as salary for NI purposes meaning that Class 1 national insurance contributions are due, along with tax on the benefit in kind equal to the value of the bill.

What to do in future

There is another way that you could avoid tax and NI on these amounts in future. Arrange for personal bills to be invoiced in the company name rather than yours, so that when your company is paying your bill it’s meeting a company debt rather than a personal one, thus avoiding the ‘money’s worth’ argument. And if you repay the bills to the company within a reasonable time of the tax year ending, you won’t be taxed on it as a benefit in kind. This means that you’ll have had tax and national insurance free use of company money.

Contact us for help

If you’re confused about director’s loans, or are thinking about paying personal bills through your company bank account, call us on 0141 418 6550 and we’ll be happy to advise.

To discuss this post contact Stephen Usher on 0141 418 6550 or stephen.usher@keypp.co.uk

– See more at: http://www.keypp.co.uk/directors-loan/#sthash.NQzCCujU.dpuf

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