Hello,
Director 'A' would like to take a loan of £200k from his company on 1st September 2022. He intends to enter into a formal loan agreement with the company and pay interest on the loan at the HMRC Official rate of 2% (calculated per day). He also intends to repay the loan in full by 1st January 2024 (within 9 months and 1 day of the company's year end of 31st March 2023).
Please can you confirm if the above would trigger a BIK and require the company to complete and submit a P11D/P11Db? And if any NI is payable by the company if the official rate of interest is being paid by the Director on the loan?
If the answer to the above question is no, this does not trigger a BIK, am I right in thinking that the only liability to either the Director or company would be the interest on the loan as agreed? Providing the official rate of interest is charged and the loan is repaid in full within 9 months and 1 day of the year end?
Thanks
Regards
Paul
Replies (22)
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Sounds fine. I'd pay up a few days before 1st January, just to be on the safe side. Imho, 1st January wouldn't be good enough.
Beware of changes in the official rate, though.
Does he even have to pay interest on the loan if he pays back in full before the 9 months deadline?
Yes, to avoid a benefit in kind income tax charge and corresponding class 1A NIC charge for the company.
He has to pay interest of at least the official rate in order to avoid the BIK of a cheap loan.
Repayment of the loan within 9 months of the y/e will only avoid the requirement to pay S.455 tax.
Does he even have to pay interest on the loan if he pays back in full before the 9 months deadline?
Yes. Afraid there are two issues to consider.
Having said that, I'm not sure that the tax benefits of paying the interest are as clear cut as implied. Personally, I'd rather pay tax on the interest than the full interest. But much depends on marginal rates.
The loan still needs to be disclosed in the accounts and CT600.
There is tax leakage so I wouldn’t do it this way. I would get an accountant given the sum involved and you will need one anyway for the accounts/CT600.
And
1 the interest must actually be paid in real money, not added to an overdrawn loan account. Tax Dragon will confirm this.
2 his payment is irrelevant. The company must have cleared funds in the company bank account, as in it must have arrived and be real a cleared balance
1st Jan is a Monday and a bank holiday, with a weekend before it
A cheque is not a payment, numerous issues on VAT about that because a cheque needs time to clear
The deliberate choice of add a day is confusing CT tax pay day with a different nine month rule
If I were your accountant I would be a bit miffed at needing to wait so long to discover whether the loan had cleared before the date so that I could file a correct return to HMRC
That check would be:
a was repayment in cleared funds done by the date?
b did the director borrow any more money since Sept 22?
c has the interest been paid and cleared by the day
If I were one of the share holders I would want to know how he intends to make full repayment. If he needs money now, how is he going to borrow the same to repay?
For all I know he may be hoping Bitcoin is a good investment.
Assumed the company has lots of spare money so that other directors can do the same
Assumed the agreement permits increases in the interest rate, as interest rates could and are probably to increase
We assumed it was a 'what if' question
No idea why the extra day was added. Repayment within 9 months rule ignored and a bank holiday added
There is a 4th option - and it's the one that I suspect would have occurred to most people as the 1st choice in the given circumstances - which would be to take out a commercial 'bridging loan'.
The options as outlined aren't comparing like-with-like ... for instance, if option 3 is based on full repayment within 14 months, then why is option 2 predicated on it taking 5 years to achieve this?
There are of course many other issue to consider - such as whether 'his' company is happy lending money (which presumably is not part of the normal nature of its business) at a not very commercial rate given forecast inflation rates.
Frankly if 'my' business was carrying cash in excess of £2m then I'd extract the £200k via any normal method (and pay the tax), so that I could complete the house purchase without distracting me from running a successful business!
Prior shareholder approval is required for a loan exceeding £10k.
Any other director who authorised the transaction or arrangement is liable to account for any gain or indemnify any loss resulting unless they can show they took all reasonable steps to secure compliance.
i guess everyone has interpreted the reference to repaying within 9 months as the director is also a participator of the company
At the start of the scene-set, OP identifies as he, 'A', a director and owner of his company.
There is a lot that hasn't been said in this thread (and it would be very easy to draw incorrect conclusions from what has been said), so to protect future readers from themselves...
- it is worth reading HMRC's 'How to complete a Company Tax Return' guide (in the current version, it's pages 39 to 43 - though, as that's five pages, the failure to explain s464A is disappointing)
- and re the BIK you really ought to read chapter 17 of the 480 https://www.gov.uk/guidance/beneficial-loan-arrangements-480-chapter-17
@OP - I have no idea if you would benefit from engaging an accountant. I would imagine you would. Whatever, you might find it worthwhile having a decent chat with a tax advisor. Remember UC(IT)A 1799.
Sorry TD but you are a great proponent of not having the full story (I entirely agree) and we don't have it here. In the first place the scene-set doesn't mention the words you attribute to it. Even if it did it would be a nonsense. You can't own a company, you can only own some or all of the shares. If the scene-set had been along the lines of "A, a director and [sole] shareholder of a limited company" that would have given all the information about the ownership of the company and that A was not only a director of said company but a/the shareholder. Nobody would have had to make any inferences, as someone else said, about 9 months etc. it would all have been perfectly clear.
As a further query, if the Director were to take the loan on 1st April 2023, and repay the loan in full before the Y/E of 31st March 2024. Would the interest at the Official Rate still have to be paid to stop triggering BIK?
Presumably, in this scenario, there are no requirements for it to show in the accounts or CT600?
Thanks
Yes - there's still an interest benefit.
Yes - it still needs disclosing in the accounts but not the CT600.