Proprietors often take loans from their companies. With some limited exceptions, loans from companies to their directors used to be prohibited under company law, however from 1 October 2007 following Companies Act 2006 (subscription sensitive), provided that shareholder approval is obtained, private companies are permitted to make loans to their directors.
The main tax implications of loans from companies to their directors are the possibility of a taxable employment benefit for the director and a 25% tax liability for the company if the loan is unpaid nine months after the period end. This is dealt with in more detail below, together with some ideas for dealing with directors’ overdrawn loan accounts (a common question in practice).
Tax implications for the company
A corporation tax charge arises if the employer is a close company and it makes a loan to a participator.
A close company is a company which is resident in the UK and is controlled by either:
- five or fewer participators
- any number of directors who are also participators
CTA 2010, s 439
A participator is a person who possesses, or is entitled to acquire, share capital or voting rights in the company. CTA 2010, s 454(2)
However, the definition of participator is wide and also includes any loan creditor of the company and any person who is able to obtain distributions from the company or direct company income or assets for his benefit. CTA 2010, s 454(2)
For a more in depth discussion, see the Loans written off guidance note.
When the loan is made to the participator, there is no immediate tax charge for the participator. The close company must pay a one-off corporation tax charge of 25% of the amount of the loan unless the loan is repaid within nine months of the year end. You may hear this tax charge referred to as the ‘section 419 charge’ (the old section number before the tax law rewrite). Again this is discussed in more detail in the Loans written off guidance note. CTA 2010, s 455
If the employer is a close company but the director is not a participator, there is no corporation tax charge at the time the loan is made.