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Start-up loans - company repays loan & interest

Any unintended tax consequences

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Hi, hopefully I'm overthinking this very common scenario with my tax hat on.  But I think it's a bit more complicated than client expected!    Client director borrowed £25k under Government scheme, paid into his personal funds.  He paid £25k on into company bank account (assumed!)  The company has then been repaying capital and interest direct to the loan company.

Client assumes it's a company loan ... and it is, but one from him as director shareholder.  And so there's additional admin for this struggling start-up - correct me if I'm wrong:

  1. Director borrows for business trade purposes; interest tax deductible (but he hasn't paid it) -  he has no significant income and doesn't file tax returns
  2. Director lends on to company; either charging interest or interest free - is it a problem with company paying interest and capital to the loan company rather than to the director? 

Assuming director can choose whether or not to charge the company interest, the options and resulting tax impact would be:

  1.  he could not charge interest and, instead, use the interest as well as the capital repayments made by company to reduce his lending to company or
  2.  he could charge the company interest (has savings allowance/starting rate band and tax deductions on interest paid - all this a tax nothing for him except he needs to reclaim 20% decucted at source).  Company has to deduct 20% and file CT61s.

The company trade is struggling - the director will have no income for a couple of years, so don't think there's any benefit from the loan having been used for new shares for income tax loss treatment if all goes pear shaped (had the director ever considered that route).  

As the 2-step loan process hasn't been followed, are there any PAYE/P11D type consequences of company setting director's pecuniary liabilities for a loan awarded to him personally? (director isn't even drawing a salary.)  I know some of you see these Government backed schemes so often. It's a first for me and I welcome thoughts.

 

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By JimH
21st Apr 2017 08:10

Changing my search terms leads to all the help @Euan MacLennan has given in past. This one nails it:

https://www.accountingweb.co.uk/any-answers/personal-loan-for-use-by-the...

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