The 2013 Budget announcements included a brief outline of how the law will be changed to tax a shareholders/directors loan taken out of owner-managed companies by the shareholders/directors (herein directors). We have now seen the draft legislation so we can give you further details of how the tax law will apply for a directors loan or repayments made on and after 20 March 2013.
Where a director borrows from his company and repays the loan within nine months of the end of the accounting year in which the loan was taken, there is no tax charge for the company.
However, where the directors loan is outstanding for longer, the company must pay 25% of the loan balance as corporation tax to HMRC. This corporation tax charge is then repaid when the loan is fully repaid.
Four changes may affect when or if this corporation tax is payable:
1. Thirty day rule
Where a directors loan of £5,000 or more is repaid to the company, but within 30 days amounts totalling £5,000 or more are borrowed by the same borrower or one of his associates, the first loan is treated as not having been repaid and is treated as continuing for the purposes of calculating the corporation tax charge.
2. Intention or arrangements in place
Where the directors loan is £15,000 or more, the thirty day rule is ignored if at the time of the repayment of the first loan, the borrower intends to borrow again from the company or has arrangements in place to do so. If those later loans are made they are treated as a continuation of the first loan.
3. Using a third party
Loans channelled from the company through LLPs or partnerships in which the director is a member are treated as if the loan was made directly to the director. This also applies if the loan is advanced to a trust of which a director in the company is a beneficiary, or potential beneficiary.
4. Conferring a benefit
This is intended for the situation where an arrangement, perhaps a partnership structure between the company and a director is used to transfer value from the company to the director. It is unclear how this will work in practice, but any partnerships involving a company and one of more individuals will have to be reviewed.