With effect from the Budget 2013 (20th March 2013), the rules have changed regarding the repayment of Directors’ Loans to prevent Directors from effectively using their Director’s Loan Account as an interest-free loan.
If you are self-employed, you can take money out of your business at any time and use it as your own without any disadvantage to the business.
However, as a company is a separate legal entity, any money that you take out of the business over and above any money that you have put in (and if that money is not due to you in the form of a salary or a dividend) is treated as a loan. The Director has received the benefit of a Director’s Loan from their Director’s Loan Account.
Prior to the Budget 2013, there were no tax implications for the company if the Director’s Loan was repaid in full within 9 months after the end of the company’s accounting period.
However, if the repayment was not made in full within 9 months after the end of the company’s accounting period, then the company was subject to a 25% Corporation Tax bill on the outstanding loan, and this loan was treated and taxed as a benefit in kind in the hands of the Director.
The company was then able to reclaim the tax paid once the Director’s Loan had been repaid in full.
Due to the nature of the rules prior to the Budget, many Directors were tactically repaying their Director’s Loans off just prior to the 9 month period ending, and soon after were simply taking out a similar loan from the company.
HMRC has amended the rules so as to deny relief for the loan where repayment of the original loan and subsequent re-borrowing are made within a short period of time.
The effect of this being that a Director can no longer take a further loan from the company (or make any arrangements for such borrowings) until at least 30 days have elapsed from the date of the original repayment. Any re-borrowing during this period will result in the company being unable to receive its 25% Corporation Tax liability back.