Directors' Loan Accounts
Philip McNeill highlights key points to bear in mind when using the updated Directors' Loan Accounts toolkit.
HMRC has updated its Directors’ Loan Account toolkit. The 2016 version will cover 2015-16 tax returns. It’s worth taking note of the toolkit, even if you have your own checklist, as it will set the standard for ‘reasonable care’ if there are errors in a return. It also highlights HMRC’s experience of common errors.
As the tax rate on loans to participators rises - from 25% to 32.5% from 6 April, 2016, it is a timely reminder that mistakes in this area can be expensive.
Links to further guidance
The toolkit has internal links to more in-depth discussion and online links to further guidance in HMRC manuals and legislation.
But be alert if you use the HMRC toolkit links to legislation. The links are to the National Archive material, and do not necessarily reflect all later amendments. For example, s 455 CTA 2010 - Charge to tax in case of loan to participator – has not been updated for FA 2013 changes.
Anyone who works with close companies knows the problem of unclear boundaries, and it is often the simple things which cause trouble. The checklist highlights possible problem areas such as confusion of business and private expenses.
Watch out for company expenses including private expenses. This can be things like the curtains for a director’s home included amongst refurbishment costs for flats of a property company. Such items should be debited to the director’s loan account.
Another common error is failing to charge PAYE on everything which forms part of the director’s remuneration. This can cover non-allowable expenses claims.
The toolkit is applicable for financial years commencing 1 April, 2015 for Company Tax Returns. It thus has the 2015-16 PAYE rules in mind. So be aware of recent changes, like travel and subsistence expenses for home to workplace travel for Personal Service Companies, where 2015-16 returns may be unaffected, but it would be prudent to remind directors that different treatment will be needed in 2016-17.
Loans to participators and overdrawn directors’ loan accounts
The Corporation Tax Act 2010 (CTA 2010) imposes a tax charge on a close company which makes loans to participators. S454 CTA 2010 is wide in scope; it does not simply cover shareholder directors. It includes loan creditors and anyone who is or is entitled to acquire rights to distributions; as well as anyone entitled to benefit from assets or income from the company.
S454 is a high risk area and it is the focus of six questions on loans to directors (including overdrawn directors’ loan accounts), and how these have been dealt with, including write-off and repayment by bonus or dividend.
It is worth bearing in mind that where the participator is also a director, there may in addition be a benefit in kind charge. The timing of any dividends or bonus intended to clear the balance is significant. Carelessness in the paperwork could mean a challenge from HMRC.
The updated toolkit can be found on the UK GOV website.