• If the overdrawn (debit balance) on a director’s loan exceeds £5,000 and the loan is made interest-free then this will be regarded as an employment-related loan.
• A taxable benefit will arise if the employer does not charge interest at HMRC’s official rate.
• Take care when calculating the cash benefit of the interest free loan, you can use an averaging or daily basis. (HMRC will use the daily basis where a loan balance fluctuates throughout the year.)
• The taxable cash benefit is the difference between interest calculated at HMRC’s official rate and the interest paid (if any has been charged). • The taxable benefit is required to be reported on form P11D. • The director will be taxed on the benefit.
• If a company does not write up its transactions contemporaneously it may be difficult for it to accurately determine when this type of benefit occurred.
Creative tax planning often involves use of Director Loan facilities, like all planning, it is important to implement properly and correctly.
If you would like more information about Director’s Loan Accounts and the tax problems they can create contact one of our Financial Planning Consultants, at Pareto Lawrence we offer both Financial and tax planning advice to corporate and private clients.