Many of our Ltd Co clients have taken Bounce Back Loans(BBL) which have been mainly used for personal use (to keep themselves afloat) rather than for their businesses. This has resulted in their director’s loan accounts being largely overdrawn along with their section 455 charges. Many of these Ltd Co clients’ turnover have been reduced due to Covid-19, thus the combination of their corporation tax, section 455 charges and self-assessment liabilities seem too high for them to cover anytime soon. A friend of mine in the practice has suggested we show the BBL as a personal loan against the Directors and therefore reduce the S455 charge and their SA liability. His basis is that whilst the Co will not receive relief on the interest the charge to interest is nominal anyway and future monthly repayments for BBL will be set off against his Director's Loan Account. With this trickle effect on the overdrawn Director's Loan Account and increased work in future the Co could cover the repayments by paying him extra dividends.
I am not sure whether this would be a correct treatment though as the BLL would be in Co name. Can he treat this as a beneficial loan (even though it is a loan to the Co) in the event of a tax inquiry? I wanted to know what other practitioners thoughts are if their clients find themselves in such a situation and how they would treat such transaction. My client has made it clear that he does not have the funds to pay now to clear all these liabilities if we go with the current situation he finds himself in. I appreciate he can negotiate with HMRC to pay in instalments which is one option.
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Don't allow this client to make his problem your problem, Tassy.
Just tell him there are many directors in the same boat as him, and he's just going to have to do it by the book and go the s455 route. All you'll do if you try to solve his woes for him is put your neck on the block alongside his.
You would just be netting off the liability against the debtor with no basis at all. Your colleague's "basis" is just reiterating the incorrect treatment, there's no justification in it.
The client has borrowed money from the company, the company has borrowed money from the bank. If the client wants to take the company out of the equation then he needs to pay off the BBL with a personal loan to him from the bank, which would solve some of the problems and achieve what you're trying to do with the balance sheet.
edit: I do not advise he does this, it is very likely a terrible solution
But what is the criminal sanction for the company acting as a (undisclosed) nominee for the human to get the loan? I'm not sure there is any, as long as there was no intention to do a runner with the money (just like judges have not disapproved of undisclosed nominee mortgagors where there is no "proper" fraud on the lender to deprive it of the lent money). If that's right, it's just a (fundamental) breach of contract, but that would not affect the tax treatment of such a nominee arrangement.
There isn't a nominee arrangement. The tax treatment follows the accounting treatment and the accounting treatment follows the facts of the loan and the facts of the loan are that it's to the company.
If you report otherwise in the accounts then the accounts are wrong and the tax is wrong.
I think your parallel drawn between undisclosed nominee mortgagors and people taking out loans under a scheme they do not have access to by pretending it's for their company (if I'm reading your interpretation of undisclosed nominee correctly) is misleading and has no bearing on this.
I can't tell if you're suggesting that such a nominee arrangement be construed retrospectively, or if it already exists solely by virtue of the actions described in the OP.
But what is the criminal sanction...
It's not just breaches of criminal law that can lead to sanctions. I have no idea on the answer to your question, but if it isn't criminal and if anybody did do what you say then they have of course stripped themselves of any protection that limited liability might otherwise have afforded them.
Yes the banks will be on the case. See the link I included below for more information on what will happen.
Another thought that occurred to me was that even if the company were to consider strike-off action assuming the company defaults on the repayments, I am almost certain the lenders would object to strike-off action and would seek a withdrawal of the same from the client (as I've seen happen in the recent past).
You can't do strike action using DS01. The loan is an asset of the Company owed by the Director. Any bank should be all over that if DS01 filed.
Shakes head in disbelief.
Dont be dragged into covering up your clients dogdy doings. Plus tell your friend to stop being a fool.
Have a look at this https://www.youtube.com/watch?v=HNV3l4GnDnA from one of regular posters.
Echoing what everyone else has said, no, it's a carp idea.
The bank lent the company the money, not the director. He shouldn't be using that money for personal expenditure anyway, so he's already on thin ice. And in a heatwave, that's not a good place to be.
if you look at the loan agreement it may say something like this section from one of my client's BBLs:
"You will only use the loan we provide under this Facility (the Loan) for the purpose of providing economic benefit to your business including, but not
limited to, working capital or investing in your business."
Is there scope to pay the Director a one off salary payment to cover all or part of the loan? It would only really work if the Director has some pa to use up but it's a thought.
One of the loan conditions of a BBL is it is used for the business purposes. It was cheap lending on favourable terms to a business to help it survive. It can't be nominated as the Director's.
In practical terms Directors didn't get a lot of help and with no other options a lot borrowed from their Company's using the BBL, I understand that happens (as long as it's funding living expenses and not being misused to buy premium bonds etc).
I've just done a set of accounts with this exact issue and shown as S455 on the CT Return - they will need to negotiate a payment plan with HMRC but that's what has to be done.
A friend of mine in the practice has suggested we show the BBL as a personal loan against the Directors and therefore reduce the S455 charge and their SA liability. His basis is that whilst the Co will not receive relief on the interest the charge to interest is nominal anyway and future monthly repayments for BBL will be set off against his Director's Loan Account.
Your friend wants to fiddle it, and justify it on the basis that the client wont lose out too much from the fiddle. Hopefully your friend is a first year trainee. Otherwise your friend is probably an idiot