As a director shareholder, you might have borrowed from the company to cover your personal expenses. However, owing money to your company can trigger a massive tax bill.
HMRC aggressively taxes loan arrangements between you and your company. This means the company must pay tax of 32.5% of the debt as it stands at the end of its accounting period, but only to the extent it hasn’t been repaid within nine months.
TAX TIP
In order for you to not repay the loan, the usual solution is for the company to pay you a dividend or bonus within the nine months. However, if your company is short on profit, this might not be an option.
What you can do is to change your company’s financial year so that it ends at a time before the money was lent to you. Therefore, the loan will not be included in the company’s accounts and the 32.5% tax charge will not apply.
If there is no point in time where the amount you owed is nil, the 32.5% charge can still be reduced by changing the company’s accounting period when the loan balance was at its lowest.
For example
Mrs Chandler is a director of ABC Ltd and its accounting year ends on 31 March. She borrows £30,000 from ABC Ltd to pay for her house extension in February 2018. She realises that she can’t afford to pay back the amount by December 2018, nine months from the year end.
Mrs Chandler could change the company’s accounting date to 31 January 2018 as at that time she had not borrowed from ABCÂ Ltd. By doing this, the tax charge will not be included in the company accounts for period ended 31 January 2018.