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Implications for an overdrawn DLA

Tax/NI/BIK implications for an overdrawn DLA

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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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RLI
By lionofludesch
02nd Jul 2022 07:33

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.

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By Cylhia66
02nd Jul 2022 08:15

Does he even have to pay interest on the loan if he pays back in full before the 9 months deadline?

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Replying to Cylhia66:
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By Taxguy96
02nd Jul 2022 08:41

Yes, to avoid a benefit in kind income tax charge and corresponding class 1A NIC charge for the company.

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Replying to Cylhia66:
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By Geoff56
02nd Jul 2022 08:42

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.

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Replying to Cylhia66:
RLI
By lionofludesch
02nd Jul 2022 08:46

Cylhia66 wrote:

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.

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By Matrix
02nd Jul 2022 08:57

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.

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By Paul Crowley
02nd Jul 2022 13:09

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

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Replying to Paul Crowley:
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By binkydoo
03rd Jul 2022 03:37

Thanks to everyone for their responses. They are very much appreciated.

It's more a hypothetical at this stage. But the scenario the Director is considering is as follows:

He wants to buy a property that is priced at ~£600,000 which has no forward chain. He has a cash deposit of £400,000 and he currently also owns a property outright, the value of which is ~£250,000.

He has the following options:

1. Put his existing property up for sale, and with the funds from that and his cash deposit, buy the new property.

2. To avoid entering a chain, take out a mortgage for £200k at ~4% in order to buy the new property. Costs over a fixed five year term are ~£40k.

3. Take a loan from his business (which currently has cash at bank of over £2m) at the official rate of 2% for approx 14 months. Giving him time to buy the new property, then sell his existing property without either transaction involving a chain. Costs ~£5.5k

To many option number 1 might seem like the sensible option. But he's had two recent instances of chains collapsing and losing out on properties he wanted buy. Wasting time and money.

I hope that adds some context to the scenario.

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Replying to binkydoo:
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By Paul Crowley
03rd Jul 2022 08:22

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

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Replying to binkydoo:
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By Hugo Fair
03rd Jul 2022 11:34

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!

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Replying to Hugo Fair:
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By binkydoo
03rd Jul 2022 12:07

Thanks, the 4th option is interesting. A bridging loan may well be the best option.

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By CWservices6064
02nd Jul 2022 17:56

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.

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By Calculatorboy
02nd Jul 2022 23:01

Is this really a question?

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By Dib
04th Jul 2022 13:28

I don't understand why s455 is relevant for a loan to a director...

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Replying to Dib:
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By Bobbo
04th Jul 2022 14:26

i guess everyone has interpreted the reference to repaying within 9 months as the director is also a participator of the company

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Replying to Dib:
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By Tax Dragon
05th Jul 2022 09:39

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.

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Replying to Tax Dragon:
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By Dib
05th Jul 2022 14:35

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.

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Replying to Dib:
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By binkydoo
05th Jul 2022 14:51

To clarify, the Director in question owns 50% of the shares. The other 50% being owned by another Director. The fellow Director has already signalled his agreement in principle to a formal loan agreement, where the HMRC official rate of interest will be charged on the loan amount.

Again, I thank everyone for their responses, they are very much appreciated. Our next port of call will be an accountant, now we are armed with more information on this subject.

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By binkydoo
04th Jul 2022 16:49

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

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Replying to binkydoo:
RLI
By lionofludesch
04th Jul 2022 16:54

binkydoo wrote:

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.

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Replying to lionofludesch:
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By binkydoo
04th Jul 2022 17:03

Thanks again, that's much appreciated.

Regards
Paul

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Replying to lionofludesch:
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By Paul Crowley
04th Jul 2022 23:26

+1

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