Loans to participators

Loans to participators

Where a close company (or LLP) makes a loan (otherwise than in the ordinary course of a business) to an individual who is a participator or an associate of a participator, a tax charge of 32.5% is payable by the company should that loan remain outstanding nine months after the end of the accounting period. The charge applies to loans to directors who are also participators, to participators who are not directors, but it does not apply to directors who are not also participators.

A ‘participator’ may be a shareholder of the company whose interest in the company is more than 5% of the share capital but the definition also includes any person having a share or interest in the capital or income of the company. An ordinary trade creditor is not a ‘participator’.

A ‘close company’ is a UK resident company under the control of:

            (a) 5 or fewer participators, or              

            (b) of any number of participators who are also directors.

The rate of tax payable is the same as the higher ‘dividend tax’ rate at 32.5%. Should the charge be paid and then the loan subsequently be repaid, repayment can be claimed but will not be so until nine months and one day after the end of the company’s accounting period in which the loan was repaid or reduced.

Where the loan has been made before the individual becomes a participator e.g. the loan is made to an individual who subsequently becomes a shareholder, then no charge is levied provided there is no link between the loan and the individual becoming a shareholder.

Material interest

As long as the participator is not also a director or employee in the company, there is no immediate tax charge for the participator. The scenario is different where the participator does not have material interest but works full time for company as there will be a charge under the benefit in kind rules should the loan exceed £15,000. There is also the possibility of a double income tax charge if the loan is subsequently waived or written off. In such circumstances not only will there be a benefit in kind on the granting of the loan but HMRC could deem the waiver to be a distribution to a participator or as earnings to a director or employee. However, there is provision in the legislation that prioritises the distribution treatment in this situation. There is no similar provision in the national insurance legislation and so this means that the income would be taxable as a distribution (dividend income) and Class 1 national insurance (both employer’s and employee’s contributions) be payable. In most small companies the director will be a shareholder entitled to vote at board level and so will also be a participator. Therefore, the distribution treatment will apply to any loans made and written off to the director or his family.

A participator who does not have material interest but works full time for company could receive small loans over several accounting periods such that eventually the aggregate exceeds the £15,000 exemption limit. HMRC’s gives the example of a director receiving:

• £5,000 in accounting period 1
• £2,000 in accounting period 2
• 10,000 in accounting period 3

Individually these loans would qualify for the exemption but in total an amount of £17,000 has been received. HMRC state that the two earlier amounts in period 1 and 2 meet the requirements for the exemption and therefore the company is not charged on those amounts. However, the full amount of £10,000 in period 3 is chargeable as not meeting the condition under s456 CTA 2010 which states that:

• the amount of the loan in question plus the outstanding amounts of loans made to the borrower does not exceed £15,000 (Condition A)

Details of the loan are required to be declared on the company tax return; the usual interest being charged on payments made late to HMRC.

Can you claim the Employment Allowance for 2021/22?

Can you claim the Employment Allowance for 2021/22?

The Employment Allowance is a National Insurance allowance that enables eligible employers to reduce their employers’ (secondary) Class 1 National Insurance bill by up to £4,000. However, not all employers can benefit – there are some important exclusions.

Eligible employers

To qualify for the Employment Allowance, the employer’s Class 1 National Insurance liabilities for 2020/21 must be less than £100,000. Where the employer is part of a group, the £100,000 limit applies to the group as a whole, not the individual group companies.

The Employment Allowance is not available to companies where the sole employee is also a director. This rules out most personal companies. However, family companies with more than one employee are able to claim.

There are other exclusions too, for example, employers who employ someone for personal, household and domestic work unless the worker is a care or support worker.

Amount of the allowance

The Employment Allowance is set at the lower of £4,000 and the employer’s secondary Class 1 National Insurance liability for the year. Once claimed it is set against the employer’s Class 1 liability until it is used up.

Example

A Ltd is eligible for the Employment Allowance. Its secondary Class 1 National Insurance liability is £1,500 a month. It claimed the Employment Allowance at the start of the 2021/22 tax year. The allowance is used as follows:

Month 1: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £2,500 (£4,000 – £1,500) is carried forward.

Month 2: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £500 (£2,500 – £1,500) is carried forward.

Month 3: The remaining £500 of the Employment Allowance is set against the liability for the month of £1,500, leaving £1,000 to pay. The Employment Allowance has now been used in full.

Months 4 to 12: The Employment Allowance has been used in full, so the employer’s Class 1 National Insurance liability for the month of £1,500 is payable in full.

Claiming the allowance

The Employment Allowance is not given automatically and must be claimed each year. This can be done through the payroll software, or via HMRC’s Basic PAYE Tools if the payroll software does not have an Employment Payment Summary (EPS) feature.

Although claims can be made at any time in the tax year, the earlier the claim is made, the earlier the employer will start benefiting from the Employment Allowance.

Claims can also be made retrospectively for the previous four tax years if the employer was eligible for the Employment Allowance, but did not claim it.

Directors’ loan accounts

A ‘Directors Loan Account’ (DLA) is an account in the company’s financial books that records all transactions between a director who is a participator (or another participator) and the company.

Transactions through the account include:

• a loan to the company from the director; or visa versa
• monies drawn by the director on account of salary, dividend or expenses
• director’s private bills paid for by the company
• company bills paid personally by the director
• shares issued on company incorporation but not paid for

Salary paid directly to a director under a contract is not recorded in the DLA as the monies will have been paid and therefore not owed by the company.

DLA in credit

When a company incorporates it is not unusual for directors to lend money to the business and this will show in the DLA as a ‘loan’ from the director to the company. As the DLA will be in credit, the director can draw on the credit balance at any time with no tax or National Insurance implications for either him/herself or the company. However, if the company pays interest on the loan, the director will be liable for tax on that interest, declaration being on the personal tax return. The company also needs to declare the payment to HMRC.

A DLA may also have a credit balance should salary or dividends be allocated to a director, but they do not draw payment. Non take-up may be for various reasons e.g. the company may be experiencing cash flow problems or the director may receive other income that might take him into higher rate tax and he does not want that to happen.

DLA in debit/overdrawn

Company

Invariably the DLA will be overdrawn throughout the accounting year as directors withdraw payments on account of dividends and expenses from the company bank account – each payment being recorded in the DLA. The directors may be liable to pay a benefits-in-kind tax charge if the outstanding balance on the director’s loan account is more than £10,000 at any point in the tax year. The company will be liable to Class 1A employers NIC.

At the end of the year, it is not unusual to find that insufficient profits have been generated to cover the amount that has been withdrawn, even after taking the salary and dividends into account, the net result being that the director will owe money to the company as the account will be overdrawn.

This overdraft must be repaid if there are to be no tax implications for both the director and the company. Should the loan exceed £15,000 and be made to a full-time working director whose interest in the company is more than 5% of the share capital then the loan needs to be repaid by the due date of payment of corporation tax (i.e. within nine months and one day of the accounting period). If this does not happen then the company is liable to a tax charge at 32.5% (a ‘section 455’ charge) on the outstanding loan at that date. If the loan is subsequently repaid after the charge has been paid then the tax is refunded (although not until nine months and one day after the end of the company’s accounting period in which the loan is repaid or reduced).

Director

Should the total of all outstanding loans from the company exceed £10,000 at any time during a tax year then the director is considered to have received a ‘benefit in kind’ from his employment. The charge is on the difference between the interest paid (if any) and interest payable at the ‘official rate’. The company will pay employers NIC on the charge and be required to declare the ‘benefit’ on the annual P11D form. HMRC is taking an increasingly dim view of such loans not least because remuneration or dividends are taxable as income when a loan is not. They will commonly ask for a detailed analysis of the DLA looking for such discrepancies as failure to notify liability to a section 455 charge. ‘Bed and breakfasting’ transactions (where the DLA loan is correctly repaid within the nine months stated but then the money is redrawn shortly after repayment through another separate loan) are also an area of interest as is failure by the company to apply PAYE at the correct time to bonuses credited to the DLA.  

Super-deduction for capital expenditure

Super-deduction for capital expenditure

To encourage companies to invest, enhanced capital allowances are available for expenditure incurred within a limited two-year window. As an alternative to the annual investment allowance (AIA), companies will be able to benefit from either a super-deduction or a new first-year allowance, depending on whether the expenditure is on assets that would qualify for main rate capital allowance or for special rate capital allowances.

Super-deduction

The super-deduction will allow companies to claim capital allowances of 130% for expenditure on new assets that would otherwise qualify for main rate (18%) plant and machinery capital allowances where the expenditure is incurred in the period from 1 April 2021 to 31 March 2023. The super-deduction does not apply where the contract for the asset was entered into prior to 3 March 2021 (Budget Day), even if the expenditure is incurred in the qualifying two-year period. Plant and machinery which is purchased under Hire Purchase or similar contracts must meet additional conditions in order to qualify for the super-deduction.

Where an accounting period straddles 1 April 2023, the rate of deduction is apportioned based on the number of days in the accounting period falling before 1 April 2023 and the number of days in the accounting period falling on or after this date.

The effect of the super-deduction is that for every £100 of expenditure on qualifying assets in the qualifying period, the company can claim capital allowances of £130 when computing taxable profits. This gives an effective rate of relief of 24.7% (130% x 19%).

Where an asset which has benefited from the super-deduction has been sold, disposal receipts are treated as balancing charges rather than being taken to pools. A factor of 1.3 is applied to the disposal receipt when calculating the balancing charge.

Companies wishing to benefit from the super-deduction should plan the timing of investments in qualifying assets so that the expenditure is incurred in the qualifying two-year period. Where significant investment is planned after 1 April 2023, consideration could be given to accelerating the investment to benefit from the super-deduction.

A company does not have to claim the super-deduction. Where the company is loss-making or profits are low, it may wish to claim writing down allowances instead or tailor the claim to reduce the profit to nil. Likewise, if the plan is to sell the asset in a few years, it may be preferable to claim writing down allowances rather than suffer the balancing charge on the disposal.

New first-year allowance

A new first-year allowance of 50% is available for expenditure on most new plant and machinery that would otherwise qualify for special rate writing down allowances of 6% where the expenditure is incurred in the period 1 April 2021 to 31 March 2023. As with the super-deduction, it is only available to companies.

This is an alternative to the annual investment allowance, which gives a deduction of 100%. However, the first-year allowance may be beneficial where the AIA limit has already been reached.