Rules on company loans to directors

New rules apply to most directors who borrow money from their company. Until now if they repaid this within nine months of the end of its accounting period, no tax charge would arise. What’s changed?

Bed and breakfast not allowed… In the 2013 Budget new rules were announced to penalise those who, in HMRC’s view, abuse the rules on company loans. This is directors who borrow money from their company, repay it to avoid the corresponding tax charge and then re-borrow the money a short while later. HMRC calls this “bed and breakfasting” and new rules aim to penalise this.

What’s changed? A close company (broadly one that’s controlled by five or fewer individuals) is liable to a tax charge where a director/shareholder borrows money from it. The charge for a company’s accounting period is 25% of what the director owes at the end of the financial year (if the amount exceeds £10,000), but this is repayable if the money is paid back within the next nine months. But by using bed and breakfasting a director can reduce or wipe out the tax bill.

 

Example. Bob is a director/shareholder of AnyCo Ltd. He often uses the company’s credit card to pay for personal items. At the end of its 2012/13 accounting year (January 31 2013) Bob owes AnyCo £16,000, but soon after repays £14,000 using cash raised from a personal overdraft. A few days later he re-borrows £13,000 from AnyCo. Despite this it will only face a tax bill of £500 (£2,000 x 25%), because £14,000 of the £16,000 owing at January 31 was repaid within nine months.

New anti-avoidance rules

There are two new rules which can catch Bob and AnyCo out in future years:

  • the 30-day rule
  • the intentions and arrangements rule.

1)     The 30-day rule  Where a director repays more than £10,000 of the money they’ve borrowed from the company and within 30 days of this re-borrows more than £10,000, the reduction that’s normally allowed in the 25% tax charge will be restricted by the lesser of the amount repaid and the amount re-borrowed (see The next step).

2)     The Intentions and arrangements rule Where the amount owed by a director is £15,000 or more, a full or part repayment of this is made and at the time the director had arranged to re-borrow the money from the company or had the intention to do so, the reduction in the 25% tax charge is restricted in a similar way as it is for the 30-day rule. Taking our example this would mean AnyCo would be taxed on £15,000 instead of just £2,000

Sapphire Summary:

Tip 1. Reduce what you owe your company to £10,000 or less no later than nine months after the end of the accounting period. But do this by taking extra salary, a bonus, etc. or dividend which is credited against the debt rather than being paid out to you. In these circumstances if you re-borrow the money HMRC accepts that this won’t trigger the new anti-avoidance rules.

Tip 2. If the amount you owe your company at the end of an accounting period is greater than £10,000, repay this within nine months to reduce the 25% tax charge, but leave it more than 30 days before you borrow more from your company.

If you repay a loan of £10,000 or more to your company and re-borrow within 30 days, the tax charge, equal to 25% of the borrowing, will apply. But where you reduce the debt by crediting a dividend or a bonus against it within nine months of your company’s accounting period, the re-borrowing won’t result in a tax charge.