Corporation Tax on Director's Loans

Introduction

If you're a company director and you borrow money from your own company, there can be significant tax consequences for both you personally and your business. When a director's loan isn't repaid within nine months of your company's year end, your company may need to pay Corporation Tax at 33.75% on the outstanding amount—though this can be reclaimed later when you repay the loan.

What is a director's loan?

A director's loan is when you (or close family members) take money from your company that isn't:

• A salary, dividend or expense repayment
• Money you've previously paid into or loaned the company

You must keep a record of any money you borrow from or pay into the company. This is known as a 'director's loan account'. At the end of your company's financial year, any money you owe the company or the company owes you must be included on the balance sheet in your annual accounts.

When your company must pay tax on loans to participators

If you're both a shareholder (also called a 'participator') and a director, your company faces a tax charge when you don't repay a director's loan within nine months of the end of your Corporation Tax accounting period.

The S455 tax charge

Your company must pay Corporation Tax at 33.75% of the outstanding loan amount (or 32.5% if the loan was made before 6 April 2022). This tax is due nine months and one day after the end of the accounting period in which the loan was made.

Interest on this Corporation Tax will continue to accrue until either the tax is paid or the loan is repaid.

You must use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period.

Bed and breakfasting rules

You cannot avoid this tax by repaying a loan and then immediately taking out another one. Anti-avoidance rules apply if:

• The original loan was more than £5,000, and you took another loan of £5,000 or more within 30 days before or after repaying it
• The original loan was more than £15,000, and you arranged another loan when you repaid it

In these situations, your company must still pay Corporation Tax at 33.75% (or 32.5% for loans made before 6 April 2022) on the original loan.

When you must pay personal tax on director's loans

Loans over £10,000

If you're a shareholder and director and you owe your company more than £10,000 at any time in the year (this threshold was £5,000 in 2013-14), your company must:

• Treat the loan as a 'benefit in kind'
• Deduct Class 1 National Insurance through the company's payroll

You must report the loan on a personal Self Assessment tax return. You may have to pay tax on the loan at the official rate of interest.

Interest below the official rate

If you pay your company interest on the loan below the official rate, your company must:

• Record interest you pay below the official rate as company income
• Treat the discounted interest as a 'benefit in kind'

You must report the interest on a personal Self Assessment tax return. You may have to pay tax on the difference between the official rate and the rate you paid.

When a loan is written off

If the loan is written off or released (including if the company goes into liquidation), both you and the company face tax consequences:

Your company must:

• Deduct Class 1 National Insurance through the company's payroll

You must:

• Pay Income Tax on the loan through a Self Assessment tax return

How to reclaim Corporation Tax

The good news is that your company can reclaim the Corporation Tax it pays on a director's loan once you've repaid, written off or released it. However, you cannot reclaim any interest paid on the Corporation Tax.

When you can claim

You must claim after the relief is due—this is nine months and one day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released. You will not be repaid before this date.

You must claim within four years (or six years if the loan was repaid on or before 31 March 2010).

Reclaiming within two years

If you're reclaiming within two years of the end of the accounting period when the loan was taken out, use form CT600A to claim when you prepare a Company Tax Return for that accounting period or amend it online.

Use form L2P with your Company Tax Return instead if either:

• Your tax return is for a different accounting period than the one when the loan was taken out
• You're amending your tax return in writing

Tell HMRC how you want the repayment in your Company Tax Return.

Reclaiming after two years

If you're reclaiming two years or more after the end of the accounting period when the loan was taken out, fill in form L2P and either include it with your latest Company Tax Return or post it separately to HMRC.

HMRC will repay your company by either:

• Using the details you gave in your latest Company Tax Return
• Sending a cheque to your company's registered office address

When you lend money to your company

If you lend money to your company rather than borrowing from it, the tax treatment is much simpler. Your company does not pay Corporation Tax on money you lend it.

If you charge interest

If you charge your company interest on the loan you've made to it, this interest counts as:

• A business expense for your company
• Personal income for you

You must report the income on a personal Self Assessment tax return.

Your company must:

• Pay you the interest less Income Tax at the basic rate of 20%
• Report and pay the Income Tax every quarter using form CT61

Sources

• Director's loans
• Reclaim tax paid by close companies on loans to participators (L2P)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.