Corporation Tax

Q & A – Company loans to directors and relatives.

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Q. I borrowed some money from my company to lend to my brother. He is paying it back in monthly instalments over three years. I am the sole director and shareholder of the company and I am not charging my brother interest on the loan. Are there any tax implications I need to consider?

A. The tax implications for the company are that the loan is deemed to have been made to an associate of a participator in the company, and as such, it will be caught by what are commonly referred to as the ‘section 455 rules’. Broadly, these rules mean that the company will have to pay tax at 32.5% on the amount of the loan outstanding nine months after the accounting year end of the company. When the loan has subsequently been repaid to the company, HMRC will refund the tax paid.

There is an exception to this, namely where a loan does not exceed £15,000, but only when the shareholder does not own more than 5% of the shares.

If an employee of a relative of an employee receives an interest-free loan from an employer, this will be a benefit-in-kind for the employee. Interest at the ‘official rate’ (currently 2.5%) is calculated, and this deemed interest is subject to tax. However, there are exceptions to this tax charge where:

– the loan is a ‘qualifying loan’;
– a qualifying or non-qualifying loan is less than £10,000; and
– the employee can show that they received no benefit from the loan to the relative.

Tax efficient remuneration through pension contributions.

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Tax relief is generally available on pension contributions at the taxpayer’s highest rate of income tax paid, meaning that basic rate taxpayers get relief on contributions at 20%, higher rate taxpayers at 40%, and additional rate taxpayers at 45%. In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way.

Pensions are a particularly tax-efficient form of savings since nearly everyone is entitled to receive relief on contributions up to an annual maximum regardless of whether they pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So, an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider.

The total amount of tax relief available on pension contributions is calculated with reference to ‘relevant UK earnings’. Unfortunately, dividends do not count towards ‘relevant UK earnings’ for pension contributions purposes. This means that where a director takes remuneration by way of a small salary and a large dividend, the dividend will not count and the individual’s pension tax relief limit may be restricted. Moreover, tax charges will apply if the limit is exceeded.

A director looking to increase their tax-free contributions limit could consider either increasing the amount of salary taken from the company (to increase ‘relevant UK earnings’), or (more likely) by making the pension contribution directly from the company as an employer contribution. Making an employer contribution has additional advantages.

Qualifying employer contributions count as allowable business expenses, so the company could currently save up to 19% in corporation tax. In order to qualify for a deduction, the pension contributions should be ‘wholly and exclusively’ for the purposes of business. HMRC will check for evidence that this is the case, for example whether other employees are receiving comparable remuneration packages.

Another advantage of making a company contribution is that employer National Insurance Contributions will not be payable, saving the company up to 13.8% on the contribution amount.

This means that the company can potentially save up to 32.8% by paying money directly into the directors pension rather than paying money in the form of a salary. Depending on circumstances, this may or may not be more beneficial than paying personal pension contributions.

Specialist Accountants for Ecommerce Businesses

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Over recent years the number of ‘online traders’ or ‘Ecommerce’ businesses has grown considerably and in the next ten years we believe the market will at least double!

Hanley & Co began advised several substantial eBay traders over ten years ago and due to the significant growth of Amazon FBA (and many other markets) we have been very fortunate to have attracted a significant number of these businesses as clients from across the UK (and overseas).

We consider ourselves to be ‘the specialists’ in this area. We are regularly contacted by businesses whose accountants just don’t handle (or understand) this sector. 

Most of these businesses need (and expect) an online bookkeeping system that caters for the complex reports flowing from Amazon, PayPal, Stripe etc.  They also need confidence that their VAT and taxes are being properly handled.

If you know of an Ecommerce business proprietor that is struggling for advice from their advisors and accountants or need certainty about their bookkeeping, VAT registration requirements (including EU / international), VAT calculations and schemes (and of course MTD) please ask them to contact us for a chat!