What happens when a company director borrows money from their business to help with personal finance, but struggles to repay the loan? While this can be stressful, there are ways to postpone the repayment cutoff in order to avoid the s.455 tax charge. Here’s what you need to know:
As an example, let’s say Joe Bloggs of Alpha Services borrowed £75,000 from his personal company on 20th March 2019, to help pay for an upcoming home move. He did this as a taxable benefit in kind, and an alternative to taking out a bridging loan, thinking it would save him paying the interest.
Joe intended to repay the loan quickly once his previous property was sold, but after months of negotiation, the potential buyer pulled out in July 2019, and interest in the property has since dried up.
Joe is now concerned about having to pay the 32.5% corporation tax charge under s.455 Corporation Tax Act (CTA) 2010, which would amount to £24,375, and is payable to HMRC.
What is the nine-month rule?
Alpha Services may be able to avoid this payment if Joe can repay the loan to the company before 31st December 2019. This is because the charge only has to be paid to the extent that the loan has not been repaid within nine months of the relevant year end.
Typically this would mean voting a dividend which is credited against the loan balance, but this would be taxable income for Joe Bloggs who is a higher rate taxpayer, so in this instance it doesn’t offer much help.
Alternatively, Joe could borrow funds from a bank to repay the loan, then use the eventual proceeds to repay the bank loan. Though this would mean he will need to pay interest, it will still be lower than the tax payable on a large dividend. If, however, Joe struggles to raise finance quickly, he may run into further problems.
So what would we recommend here at Price & Accountants? A great way to make this work for you is to change the accounting date.
What does it mean to change the accounting date?
Joe Bloggs could alter the Alpha Services accounting date to just before the loan was issued, meaning the loan would essentially disappear from the records until the next accounting period, giving Joe more time to sell his property and repay the company without being required to pay the s.455 charge.
Doing this would mean that, if the loan was issued on 20th March 2019, and Joe changes his company’s accounting date to 28th February 2019, the loan will not show up in the accounts until the year ending 28th February 2020, giving him until 30th November 2020 to sell his house and pay back the loan.
What about changing this back?
Joe can shorten the company’s accounting period as many times as he likes, but can only lengthen it once every 5 years, with some exceptions. Provided that Alpha Services has not changed the date before, Joe can revert back to a 31st March year-end whenever he wishes, if at all.
If you want to find out more about tax on your director’s loan, get in touch with our team at Price & Accountants. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.
Every startup needs working capital to grow, and there are several ways to get this… but which one is the best? As the founder or owner, you could provide capital by purchasing more shares or by simply lending your company the cash. This could offer a more speedy return on your investment, and make you more tax efficient at the same time.
Is funding by buying shares not advisable?
Many people buy shares in order to provide more capital, and while there is nothing wrong with this, depending on your situation there may be other, more beneficial ways. One of the biggest disadvantages of buying shares is that you may need to wait a while for any Return on Investment (ROI). Your company can pay you dividends but only when it is making a profit and in the case a new startup business, it may take a while. There’s also no guarantee that you’ll see a return on your investment at all.
What’s so great about funding by loaning capital?
If you’re looking for a faster ROI as many founders, then lending your company the money could be the way to go forward. Providing a loan means that you can be paid interest straight away, plus loans are generally more flexible than being paid dividends as you can receive some or all of your money back without being required to cancel share capital, which could significantly affect your tax. This leaves you with more control of your money, which as an investor, feels much safer.
How can being married help?
If you happen to be married or in a civil partnership, then lending to your company could bring you even better tax advantages, so it’s worth exploring this avenue fully.
These tax advantages also work if you are unmarried with a “significant other”, however as a general rule, it’s much easier if you have combined finances through a lawful marriage or civil partnership.
This arrangement can help you save on tax if your partner pays a lower rate of tax than you do, as they can lend you money and charge you interest. You then lend the money to your company and charge the company a similar interest rate.
How does this work?
Doing things this way requires that a) the interest is taxable, and b) any interest paid on qualifying loans that are used for company funds, the purchasing of equipment, or for working capital for a trading company are tax deductible.
Here’s an example that breaks this process down:
Joe is a director, shareholder and higher rate taxpayer of the Joe Bloggs Ltd., and the business requires some new equipment. Joe’s wife Jane is a basic tax payer, and so she makes an interest-free loan of £100,000 to Joe, who then lends this to his company Joe Bloggs Ltd., charging interest at 7% per annum.
Joe is liable for tax of £2,800 (£7,000 x 40%) on the interest he receives from Joe Bloggs Ltd. Joe doesn’t pay Jane any interest which means there is no tax relief for him to claim (though the loan to Joe Bloggs Ltd. does qualify).
Alternatively, if Jane decides to charge Joe the same rate that he charges Joe Bloggs Ltd. (7%) instead of an interest-free loan, then the interest Joe pays Jane will be tax deductible. This means the taxable interest (£7,000) he is paid by Joe Bloggs Ltd. equals the tax deductible interest he must pay to Jane. One cancels out the other, and instead of paying £2,800 in tax, Joe pays nothing.
Jane’s loan to Joe isn’t a qualifying loan, so she will have to pay tax on the interest she receives from him. Luckily, as Jane is a basic rate taxpayer, her bill is £1,400, meaning a tax saving of up to £1,400, and possibly much less depending on Jane’s other sources of income. As mentioned earlier, the advantage of doing things this way means that even if Joe Bloggs Ltd. is not making a profit at the moment, it can still pay Joe a return on his loan. This is often the best and most tax efficient way for company founders to provide capital to their business.
Want to find out more about how this could help make you more tax efficient? Get in touch with our team at Price & Accountants to discuss how we can help. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.
A company car scheme is a great incentive for employees, allowing businesses to attract and retain the best talent, but every year the tax and national insurance that goes along with company cars rises, and it could be costing both you and your company more than necessary. If your car is more than a few years old, it may be more tax efficient to transfer ownership to you. Here’s why:
How does company car tax work?
If you have been driving a company car for a while, you will likely to know that the income tax is primarily calculated on the list price of the car was new and when it was first registered approval on its CO2 emissions. The price of the car when new will remain the same, but the CO2 emissions will inevitably creep up year after year. When this happens, it means that your company car is costing you more in tax, and your company more in NI with each year that passes. Meanwhile, as with any vehicle that is being used day-to-day, the value of the car decreases. This is why it can eventually become much more tax efficient for both parties if your company hands the car over to you instead.
What makes this more tax efficient?
Let’s look at an example of this in action to explain how it works:
Jane gets a new car from her company, Acorn Ltd., which costs £28,000 as of April 2014. It is estimated that this car will be replaced in April 2021. At the moment, the car is worth £12,000, and has CO2 emissions of 175g/km. Jane will be taxed on £10,360 in the year 2019/20, and also in 2020/21 (total: £20,720) and Acorn will be required to pay Class 1A national insurance on this amount.
If, instead, Acorn gives Jane ownership of her company car on 6th April 2019 (the beginning of the new tax year), they will only need to pay a one-off tax and national insurance charge on £12,000, saving them money in the long run. As a higher rate taxpayer, this transfer will mean Jane saves £3,488 in tax, and Acorn saves £1,203 in national insurance.
Surely that’s a no-brainer?
For the most part, it is. But while this may seem like a great idea, before you jump ahead and start the process there are a few other things to consider, primarily the cost of running the car as this can affect the cost effectiveness of this plan. If Acorn Ltd. pays the running costs of the vehicle and gets tax relief on these costs, they can continue to do so even after the car has been transferred to Jane. However, this would mean Jane will need to pay tax on these running costs paid by Acorn – why would Jane do this, you ask? Basically, she wouldn’t. To further equalise things and make the transfer fair on both parties, Acorn can pay Jane a mileage allowance for her business journeys, counteracting this tax and making both Jane’s and Acorn’s costs lower overall.
How can my business pay me a mileage allowance?
Imagine Acorn Ltd. pays the running costs of what is now Jane’s car (let’s say £1,600 in 2019/20 and £1,700 in 2020/21). During this period, Jane drives 9,000 business miles, and because she now owns the car Acorn can pay her up to 45p per mile (tax and NI free) to cover the cost of fuel and any other charges she may incur.
If the cost of fuel comes to, for example, 13p per mile, this leaves an extra 32p per mile that Jane can use to partially pay back Acorn for the £3,400 worth of running costs it pays, leaving a mere £520 liable for tax and national insurance.
This of course means that the saving made by Acorn is reduced by transferring the car to Jane, but overall both parties are still much better off than they were previously.
- Look into the tax and national insurance of company cars that are more than a few years old, and identify where there are savings to be made depending on the car’s list price, CO2 emissions, mileage and running costs.
- Make sure your contract is directly with the insurance company or garage, as this will ensure your tax and national insurance are as cost effective as can be when your company pays the running costs of your own car.
- When your company transfers the company car to you, they lose an asset, so in the example above, Acorn lost £12,000 from their balance sheet because the car no longer belongs to them, it belongs to Jane. As long as Jane is the only shareholder in Acorn then this won’t matter, but if other shareholders are involved, then this transfer may need to be compensated.
If you would like further clarification on the above, or want to find out more about becoming even more tax efficient with your company car setup, get in touch with our team at Price & Accountants to discuss how we can help. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.