Business owners are often strapped for cash not because their businesses are unprofitable but often because having spent years building up the business they have aspirational lifestyles and want to live in a big house and to create personal wealth outside of the business.
What we have found useful in the past is to include within our planning the use of loans from their business. Used creatively this has really useful means of easing the cash flow constraints for Directors without having to pay tax.
What used to be possible was for a director to take a substantial loan the day after his trading year had closed and then have the use of that money for 21 months.
If the loan was still outstanding at the end of that period then it must pay tax of 25% of the amount of the loan which is still outstanding nine months after the end of the chargeable accounting period in which the loan is made (s455 CTA 2010 – the loans to participators rules).
The purpose of this rule is to deter companies from making untaxed loans to their directors rather than paying remuneration or dividends which are taxable as income.
Even when a 25% tax has been levied, it was still possible to get that money back as when the loan is repaid by the director, tax previously paid will be refunded back to the company. There is quite a delay in getting the tax back as this will normally be nine months and one day from the end of the accounting period in which the repayment of the loan is made.
However two significant changes are being introduced to the tax system which could impact on your profit extraction policy going forward: the introduction of new payroll reporting requirements under the Real Time Information (RTI) system, and restrictions on the ‘recycling’ of director’s loan accounts announced by the Chancellor in his March 2013 Budget.
However, in his Budget speech on 20 March 2013, the Chancellor made an important announcement in relation to close company loans to employees and participators. The Government’s intention is to ensure that “the repayment rules are reinforced so relief is only given for genuine repayments.”
What the Government doesn’t like here is that loans may be repaid within nine months of the accounting period, so preventing the tax charge becoming due and payable, but then the money is redrawn very shortly after the repayment through another separate loan. In other words, the repayment was never intended to be lasting.
With effect from 20 March 2013, where a loan is made (and repaid within the nine month limit) and there is a clear intent for a new loan to be granted by the company to the shareholder, this will be considered as an extension of the original loan and therefore caught by the loan to participators rules.
A new “30 day rule” will be introduced to deny the relief if within a 30 day period repayments of more than £5,000 are made to the close company in respect of a loan which gave rise to a charge to tax and amounts are then redrawn through a loan.
Even if the 30 day rule does not apply to deny relief, relief will be denied if there are loans outstanding amounting to at least £15,000 and at the time of a repayment there are arrangements, or an intention, to redraw the amount through a loan (and an amount is subsequently redrawn).
Therefore if you are a Director with a substantial negative Directors Loan balance, you need to review your forward planning.
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