Managing personal expenses in company accounts
Chris Campbell CA, Head of Tax (Tax Practice and Owner Managed Business Taxes) at ICAS looks at the tax issues where directors of a company owe the company money.
When an unincorporated business incorporates, the business owners will generally be the shareholders and directors of the limited company. They'll often be used to paying personal expenditure through the business, which could quite easily be added back as disallowable for tax purposes in the business tax calculations of the unincorporated business. But the position can become more complicated if a company pays for their personal costs.
Handling personal expenditure in company accounts
If a company pays a director’s personal expenditure, it’s necessary to consider whether this should be included as an expense in the company accounts (and treated as taxable on the employee personally which would likely be tax deductible for the company), or whether the director’s loan account would be a more appropriate route. If the director’s loan account is considered, it’s important not to claim VAT on the expenditure, even if the VAT would otherwise be recoverable, as personal expenditure would not be eligible for VAT recovery as input tax.
The tax issues of the director’s loan account for the director
If an employee or director has a loan account with the company that is overdrawn by more than £10,000 at any point in the tax year (not the company’s accounting year), it can result in a beneficial loan interest benefit in kind. This could be mitigated if the employee or director pays interest to the company, which is taxable and included in the company’s profits, chargeable to corporation tax as a non-trade loan relationship credit.
The benefit in kind is based on the HMRC official rate of interest and must be reported on the director’s Form P11D after the tax year ends. The company is required to pay Class 1A National Insurance, which is currently charged at 13.8% of the taxable benefit in kind.
Forms P11D must be submitted to HMRC by 6 July following the end of the tax year, along with the employer declaration Form P11D(b). Class 1A National Insurance is payable by 19 July following the end of the tax year (or 22 July if paying electronically).
The tax issues of the director’s loan account for the company
If a participator in a close company or an associate of a participator is due a loan balance to a company, Section 455 CTA 2010 (previously Section 419 ICTA 1988) applies.
The company must pay tax on a loan balance to a participator unless it is repaid within nine months of the year-end. Originally charged at 25%, Section 455 tax is payable at the dividend upper rate in Section 8 ITA 2007, which is currently 33.75%.
In some cases, there can be exceptions to Section 455 liability, such as:
- Loans for goods or services in the ordinary course of its trade or business, unless the credit given exceeds 6 months or is longer than that normally given to the company’s customers.
- Loans up to £15,000 to employees who do not have a material interest in the company. In the case of owner managed businesses, the directors and shareholders normally have a material interest in the company and the loan balance is therefore subject to the Section 455 rules.
Where Section 455 tax has been paid, it will be repayable to the company nine months and one day after the end of the accounting period in which it has been repaid following the completion of Form L2P.
There are special rules on what is classed as a repayment, so if there is a repayment and subsequent advance, Section 455 tax may still be payable under the “bed and breakfasting” or “arrangements” rules. If there is an intention for a loan to be redrawn after it has been repaid, these rules can mean that the repayment will be allocated against the subsequent advance and that Section 455 will still be payable (or not repaid if already paid).
Our tax experts explain the key issues in our webinar Tax issues regarding loans and dividends: What you need to know.
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