Company Loan and Tax Implications | The Accountancy Solutions

When you are part of a partnership or a sole trader, it’s possible to take money out of your business to use for personal reasons without incurring any tax implications. If you are operating a limited company, however, it is legally separate from its directors and shareholders and this means further consideration is necessary.

When company directors withdraw funds from the company that they didn’t contribute to, assuming the money is not part of a salary or dividend, it is regarded as a director’s loan. Each director must have their own loan account with details being shown separately on the company’s records. Whether the directors’ loan accounts are purely book-keeping entries or are a true loan account, it is essential to record all entries accurately since HMRC are entitled to carry out compliance checks.

Withdrawing Company Funds

Should a company director take any money from the company’s funds, this is a loan. Whether used for a personal reason or any other purpose, it should be transferred into the director’s loan account from the company expense account. The director can pay off their loan by paying money into their director’s loan account. Alternatively, a divided or remuneration can be paid by the company into the account. While directors’ loans are usually seen as a cheap way of borrowing from their company, should it not be repaid in the required timeframe, it could become extremely costly.

Corporation Tax

When the director’s loan is completely repaid before the final day of the accounting period for the company’s Corporation Tax, no Corporation Tax should be paid on the director’s loan and it will not be included in the Company’s Tax Return. However, if it has not been fully repaid by this date, but is paid within 9 months plus one day following the accounting period’s last day, although the loan must be added to the Company’s Tax return, no Corporation Tax will be paid. On the other hand, if the loan remains outstanding after that time, not only must it be added to the tax return, Corporation Tax also has to be paid on the loan at a rate of 32.5%. This amount can then be reclaimed once the loan has been fully repaid.

If you need help with company tax returns and HMRC company compliance please contact The Accountancy Solutions on 01216297768 or 02070784001 for further advice.