Still owe the company?

What is the problem?

If you borrow money from your company it not only has legal consequences under the Companies Act 1985, but tax disadvantages too. What are they and how can they be avoided?

Company law. The Companies Act requires loans to directors to be separately identified. It’s not enough to put the loan to the director in “debtors” - which is what it is, a debt to the company - it must be shown either on the face of the balance sheet of your accounts, or in a note to those accounts.

Tax. Not only will you pay tax on a benefit-in-kind by reason of having such a loan, but in addition, the company will have to pay over to the Taxman a sum equal to 25% of the loan. However, the Taxman repays the latter sum to the company when you repay the loan.

Putting it right

So, if you find yourself or a fellow director owing the company at the end of the year, what can you do to avoid these problems?

Warning. Though tempting, don’t even think of backdating a document to put it right or you’ll add criminal liability to your other problems!

Tip 1. It’s well worth making sure that the amount is paid as soon as possible so that a note can be made in the accounts. All it needs to say is “the amount has been repaid”. In many cases this will discourage the Taxman from taking the matter further provided, of course, you don’t do it too often.

Tip 2. It shouldn’t be difficult for you to borrow money from your bank to repay the loan to the company. The payment will, of course, go into the company’s bank account and as far as the bank is concerned, it’s no worse off (provided you and the company are with the same bank). You will be given tax relief for any interest paid on the borrowings so there is little reason not to rearrange the financing to put this right.

Tip 3. Alternatively, the position can be corrected by paying a dividend to you (if you’re also a shareholder) before the year-end. Indeed, this might be a more attractive solution (as dividends are not liable to NI).

Warning. Whatever you do, don’t cover it up by repaying the amount just before the end of the year and drawing it out early in the following year. At least not for 40 days - the period highlighted in the Taxman’s own manual.

Post year-end blues

Late bonus. Can the loan be repaid by voting sufficient salary after the year-end? Yes, but the salary had not been voted to you at the year-end and cannot therefore be credited to your account at that time. It should be shown in “creditors” and not be deducted from the amount you owe to the company.

The Taxman knows all about this and if your accounting treatment is wrong you can expect to be investigated fully. After all, if you prepare accounts incorrectly in this respect, the Taxman may well expect to find other irregularities through a searching enquiry into your financial affairs (something to be avoided at all costs).