When operating a company a lot of director shareholders don't give enough consideration to how they extract money. Occasionally this leads to an overdrawn Director's Loan Account.
There are a number of tax and company law considerations to bear in mind when a company makes a loan to a director.
The general rule within company law is that a company making a loan to a director must seek the approval of its members however there is an exception to this if the loan is less than £10,000.
The actual making of the loan in itself does not trigger any tax charges but there are tax consequences for the period of time the loan is outstanding. The director will incur a benefit in kind charge if the loan exceeds £10,000 at any time during the tax year. If the director pays interest to the company the benefit can be reduced and even eliminated. There are certain conditions attaching to this.
If the loan remains outstanding more than 9 months and 1 day after the year end the company itself will be faced with a section 455 charge (CTA 2010 s455 liability). The s455 tax is currently 32.5% of the amount of the loan outstanding at that time, effectively the equivalent of the tax that would be due if the loan were classed as a dividend (for higher rate taxpayers). In recent years the introduction of specific anti-avoidance legislation has tightened up abuse of these rules.
If the loan is written off tax implications arise. The director/shareholder is treated as receiving a dividend equal to the amount of the loan which is charged to income tax. The amount written off is subject to Class 1 NIC.
If the loan is repaid by the director/shareholder the company will obtain a refund from HMRC of the s455 tax. The s455 is repayable 9 months and 1 day after the end of the accounting period in which the loan is repaid.