Feb. 28, 2014, 12:02pm

With new legislation now in place here is a simple breakdown demystifying the ins and outs of shareholder loans for companies and directors.  Tax pitfalls are forecast for firms falling short of new legislation on company loans to shareholders.  Companies confused, disobliging or unaware of the new regulation, which effects transactions made from March 20th 2013, run the risk of paying unnecessary corporation tax.


As announced in March’s Budget the legislation means that shareholders who fail to repay or are ‘falsely seen’ to repay their loans within nine months of their business’ year-end will result in the company paying 25% of the loan to the taxman.


The new regulation from HMRC aims to prevent specifically the practise of avoiding the payment of tax by repaying the loan shortly before the tax is due but then effectively withdrawing the same money soon after as a new shareholder loan.


So what does this mean for your business?  If loans or advances on a current account are made to a shareholder or an associate of the individual, such as a family member, the amount needs to be cleared within nine months of the accounting period ending in which these amounts arose to avoid being taxed.


If the loan is repaid after this date, corporation tax will be repaid but not until nine months after the end of that accounting period in which it is repaid.  So the company will need to pay the tax and wait patiently for it to be repaid.


Sound straight forward enough so far?  Well now for the rules and I’ll keep it to the point unlike HMRC’s unnecessary and confusing jargon.


1). 30 day golden rule:  If a shareholder or associate has a loan for £5,000 or more and repays it to the company shortly before the nine months period ends but then within the following 30 days takes a new loan or advance of £5,000 or more the old loan is effectively treated as if it has not be repaid and the taxman will come knocking.


There is a simple solution to this and you don’t need to be a brain surgeon to work it out, wait at least 31 days!


2). Arrangement rule: This applies where –


  • The outstanding amount from the shareholder is £15,000 or more;


  • At the time the loan is repaid by the shareholder, arrangements had been made to make a new withdrawal with the effect of replacing some or all of the amount repaid; and


  • A new payment is made to the shareholder or an associate under the arrangements of £5,000 or more.


Knowledge or in this case educated guidance is power so if you require further advice about the new legislation contact us 01642 878555 or visit

— Tindles

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