Loan to Directors

Loan to Directors

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Hi ,

My question is Is Loan to director is illegal i must have read some where that CA 85 does prevent loan to directors if > £5000 .

If this is the case then when S419 Liability arises , Is it legal to give loan to participators .

I am slightly confused about this issues .
Rehan Arain

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Euan's picture
By Euan MacLennan
02nd Jan 2007 10:47

Company & Tax law
s.330(2)(a) CA 1985 states that a company shall not make a loan to a director, but s.334 states that this does not apply if the loan does not exceed £5,000. So, it is legal for a company to lend up to £5,000 to each of its directors.

The tax position is entirely separate and is not concerned with loans to directors as such, but with loans by close companies to their participators, who are the shareholders (and lenders to the company). Small companies are almost always close and the directors will usually be shareholders, so it means much the same. s.419(1) ICTA 1988 states that the company is liable to pay, as if it were corporation tax, 25% of any amount advanced to a participator. There is no de minimis of £5,000. s.419(4) provides for a refund of the tax after the loan is repaid, so this s.419 tax is a temporary deposit with the Revenue.

There is also a taxable benefit in kind under s.175(1) ITEPA 2003 on cheap loans to directors and other employees - cheap meaning interest-free or interest below the official rate for the tax year. The undercharge of interest is treated as earnings and is subject to income tax for the employee and Class 1A NIC for the employer. This is also subject under s.180 to a de minimis threshold of £5,000.

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By Paul Soper
03rd Jan 2007 14:04

And the penalty is....
If the company makes an illegal loan there is no fine or penalty as such, but the loan becomes ultra vires as regards the company. As in 99 out of 100 cases the loan is to the person who owns the company this legal nicety is ignored, hence the prevalence of illegal loans. Of course were the company insolvent the liquidator would view this as an illegal distribution and recover the sum accordingly.

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