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Claiming back corporation tax on an overdue director’s loan

Claiming back corporation tax on an overdue director’s loan

A director’s loan must be repaid within nine months and one day of the company’s year-end, or you will face a heavy tax penalty. Any unpaid balance at that time will be subject to a 32.5 per cent corporation tax charge (known as S455 tax). Fortunately, you can claim this tax back once the loan is fully repaid – however, this can be a lengthy process.

If you have taken longer than nine months and one day to repay your director’s loan and have been charged corporation tax on the unpaid amount, you can claim this tax back nine months after the end of the accounting period in which you cleared the debt. This is a long time to wait and the process can be onerous, so it’s best to ensure you don’t end up in this position.

One possible workaround is to put off paying your company’s corporation tax until your director’s loan is repaid. Your corporation tax payment deadline is nine months after your financial year end, which can give you extra time to repay the loan.

Can I repay a director’s loan and then take out another one?

You have to wait a minimum of 30 days between repaying one loan and taking out another. Some directors try to avoid the corporation tax penalties of late repayment by paying off one loan just before the nine-month deadline, only to take out a new one. HMRC calls this practice ‘bed and breakfasting’ and considers it to be tax avoidance. Note that even sticking to the ’30-day rule’ is not guaranteed to satisfy HMRC that you are not trying to avoid tax. This is why you shouldn’t make a habit of relying on director’s loans for extra cash.

Taking out a director’s loan ‘by accident’

It is even possible to take out a director’s loan inadvertently, by paying yourself an illegal dividend. As director you may choose to take much of your income in dividends, as this is generally more tax efficient than a salary. However, dividends can only be paid out of profits, so if your business has not made a profit then legally no dividends can be paid.

If you don’t take enough care in preparing your management accounts, then you may declare a profit by mistake and pay yourself a dividend. This illegal dividend should then be considered to no credit check payday loans Waterville OH be a director’s loan, and recorded in the DLA. You should then make sure to repay it within the nine-month deadline.

Can I lend money to my company?

It’s possible to make a director’s loan the other way round, by lending to your company. This may be an option for you if you want to invest money into your company (e.g. to fund its ongoing activities and/or buy assets) but only a temporary basis.

If you decided to charge interest, then any interest that the company pays you is considered income and must be recorded on your self-assessment tax return. The company treats the interest paid to you as a business expense, and must also deduct income tax at source (at the basic rate of 20 per cent). However the company will pay no corporation tax on the loan.

Director’s loan checklist

Here is a short summary of things to remember if you are considering borrowing money from your company or lending to it.

  • Take out director’s loans only when absolutely necessary (i.e. explore all other options first)
  • Repay your director’s loan within nine months and one day of the company year-end if possible
  • Aim to borrow less than ?10,000

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