Personal and family companies often make loans to directors. However, there can be tax and National Insurance implications of doing so. Where the loan remains outstanding nine months and one day after the end of the accounting period in which it is made, a tax charge arises on the company. Tax charges may also arise if the loan is written off.
HMRC have recently written to individuals who between 6 April 2019 and 5 April 2023 received a director’s loan that has been released or written off and who may not have declared the amount written off as income on their Self Assessment tax return. Individuals affected can tell HMRC about the loan using their online disclosure service (see www.gov.uk/guidance/tell-hmrc-about-underpaid-tax-from-previous-years). An individual’s agent can make the disclosure on their behalf.
Where a loan was written off after 5 April 2023 and not declared on the Self Assessment tax return, there is no need to use the disclosure service; instead, the tax return can be amended.
Tax consequences
Where a director’s loan is written off, there are implications for the company and the director. If the loan is one in respect of which the company has paid tax (section 455 tax) because the loan was outstanding nine months and one day after the end of the accounting period in which the loan was made, the write off will be treated like a repayment as far as the company is concerned. This means that the company is able to apply for a repayment of the associated section 455 tax. The repayment can be claimed nine months and one day after the end of the accounting period in which the loan was written off. This can be done online (www.gov.uk/guidance/reclaim-tax-paid-by-close-companies-on-loans-to-participators-l2p). The company must declare the loan write-off on the supplementary pages of its company tax return.
As far as the director is concerned, the amount written off is treated as a distribution and taxed at the dividend tax rates. The director should declare the amount written off on their Self Assessment tax return.
Where the director is also an employee there is also a potential charge under the employment income rules. However, the dividend treatment outlined above takes precedence so there is no double charge.
National Insurance implications
The National Insurance position is more complex. Where the loan is derived from an employment, Class 1 National Insurance (employer and employee) will be due as the write-off is treated as earnings for National Insurance purposes rather than as a dividend (on which no National Insurance is due). HMRC will generally assume this to be the case.
An alternative scenario is that the write-off is shareholders’ funds rather than earnings and is not related to the director’s work for the company. If this is accepted to be the case, there will be no National Insurance to pay. To provide weight to this argument, the write-off should be approved at a general meeting of the shareholders or by a written resolution. However, it should be noted that HMRC may issue a successful challenge.
Alternative approach
Rather than writing off the loan, if the company has sufficient retained profits it would be better to pay the director a dividend which could then be used to clear the loan. The income tax position will be the same, but as there is no National Insurance liability on dividends, the National Insurance issue is avoided.
