Bounce back loans taken by close company director
The UK government paid out bounce back loans to many small companies which it was intended to help small companies to address any issues that they might encounter and keep the economy going. However many small companies which is run by one director has taken these loan to their personal accounts to help them with their living expenses, which they end up as being overdrawn in the director loan accounts. Now what option is available for the company to account for this problem?
- If there is enough reserves from previous years or in deed if the company made enough profit for the year then the issue is simple, a dividend is declared, but what is this option is not available
- Take the loan as a salary and pay income tax and employer and employee national insurance which this could be very expensive.
- Pay s455 Corporation tax charge of 32.5% which is refunded once the loan is paid back to the company as above i.e. dividend or salary is declared. Again quite expensive
- Write off the loan, and this is the most favourable option and the tax is much lower than you would have expected. Here the loan will be declared as bad debts and the company will not benefit from this and it will be added back to the net profit, which 19% corporation tax is payable or maybe not, it depends on the accounts for the year which one will assume is at loss, otherwise a normal dividend would have been declared. So then what next, the director self-assessment for the year will treat this bad debts ie (close company loans written off) as if a dividend was declared and on the first £2k is tax free and assume no salary was taken for that year the rest of the loan of £48k is taxed at 7.5% making tax payable of £3600 and that is all.
HMRC might argue that this bad debts is actually remuneration and income tax and National insurance is payable, however the Law states that if the write off of this kind which is prima facie chargeable either as earned income or dividend, it is the dividend option which will prevail.
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