Posted Aug 19, 04:41 PM
The 2013 Finance Act has introduced new rules to address perceived abuse of the director’s loan provisions.
To re-cap the basic position, where a company lends money to its participators (shareholder / director in small company cases) it effectively also has to loan 25% of that sum to HMRC. When the participator repays the company HMRC will also repay its loan. However there is a relief which says that provided the loan to the shareholder is repaid within 9 months of the accounting date then no charge is made by HMRC.
What seems to have been happening is that some participators have been repaying the loan and then immediately drawing it down again. This kind of re-cycling of loans means that a participator can have the benefit of company money without ever paying income tax on it.
The new rules introduce a 30 day waiting period and a number of other anti-avoidance measures to prevent this abuse. Companies where there is a habit of overdrawing the directors loan account will need to review the position to ensure they are not caught by the new rules.
The answer is of course to manage the relationship between a company and its directors/shareholders to fall outside the new rules.
The charge on loans to participators discussed above is extended to loans to partnerships.
The use of corporate entities in connection with partnerships has become popular particularly with professional firms. In the light of the new provisions such arrangements need to be reviewed to ensure that they are not caught within the new rules.
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