QUESTION: In a previous query your colleague Shane Martin covered the implications of a company providing a short-term loan to an employee. Are there any additional implications if the loan is made to one of the shareholders?
ANSWER: All the implications of providing loan to an employee will apply if the shareholder is also an employee or office holder of the company, such as director, and therefore the previous advice stands. However, there are additional implications for a loan to a shareholder.
Where the company is considered a “close company” and it has loans to “participators”, a term that includes shareholders, can trigger what is known as the s455 tax, or directors’ loan tax.
The s455 Tax is payable along with the company’s corporation tax return at a rate of 33.75% on the lower of the amount outstanding at the year end and nine months after the year end. Notably, tax losses cannot offset this tax, which can place additional strain on the company’s finances.
There are some exceptions where the s455 Tax does not apply. These include loans made in the ordinary course of business by a company that lends money as part of its operations, loans related to the supply of goods and services that are provided in the usual course of business (as long as the credit terms don’t exceed six months), and loans under £15,000 made to borrowers who work full-time for the company and do not hold a material interest in the business. A material interest is defined as owning, together with any associates, more than 5% of the company’s ordinary share capital.
Unlike other taxes, the s455 tax is temporary. The tax is repaid once the loan is cleared, but it cannot be reclaimed from HMRC until nine months after the end of the accounting period in which the loan is repaid. This delay can cause cash flow challenges for companies that may overlook this timing issue.
To minimise the impact of the s455 tax, some businesses aim to clear any outstanding loans before the nine-month period ends. However, specific rules apply if the loan is only paid off for a brief period to avoid the tax. It is crucial for businesses to consult with tax advisers before determining that no s455 tax is due on a director’s loan in the year-end accounts.
Finally, it is important to consider whether the loan is permissible under company law. Shareholder approval is typically required for loans over £10,000 to directors. While this is often a formality when the loan is made to a controlling shareholder, loans to minority shareholders will require a consensus from other shareholders.
Before moving forward with a loan to a shareholder, companies should seek expert advice to navigate the tax and legal complexities involved.
- KellyAnne Murtagh (kellyanne.murtagh@aabgroup.com) is senior tax manager at AAB Group Accountants Ltd (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.