Yes, you can. If you have loaned money to the company you are simply repaying yourself the debt owed to you, but if you withdraw more than the balance you paid into the company this could result in an overdrawn directors loan account. An overdrawn director’s current account that is not repaid is treated as an outstanding loan and this may create tax complications for both the company and its director:
- Company tax: a section 455 tax charge at 32.5%
- Income tax: a taxable benefit on interest-free loans or tax charge on write off
- Compliance: Corporation tax return extra schedules and P11D reporting
Company tax charge on outstanding loans to participators: s455 CTA 2010
- When a director (or any other participator in a close company) is made a loan which is left outstanding for more than 9 months after the company’s accounting period end, the company will be required to pay tax under s455 CTA 2010.
- Section 455 tax is payable at 32.5% of the outstanding loan balance made on or after 6 April 2016).
- Tax is due 9 months and one day after the end of the accounting period in which the liability arises.
- When the loan is repaid in full or in part s455 tax is fully or proportionally repayable 9 months and one day after the end of the accounting period in which the repayment is made.
- Where a loan is repaid and then a similar sum advanced shortly after, under measures the repayment may be matched to the later advance, the effect being that there is no actual repayment. Where a director maintains a current account and also a loan account, the two balances may be kept separate and accounted for separately.
- If one individual has two loan accounts that are accounted for separately for reporting purposes and one is overdrawn HMRC may try to resist aggregating them for tax and so will not treat the two as one net balance.
- Two directors (typically spouses) may agree between them to allow an offset so that one's loan credit is set against the other's loan debit: HMRC will not accept the offset unless there is evidence to prove the intention to create a joint loan account.
Top tip: the company and relevant director should agree the treatment of aggregating or offsetting loan accounts at the time that the loans are made or when two are to be offset and record this in a board minute at the time. Better still for the board to pass a resolution to agree treatment. Back-dating of any of this documentation is bad practice unless there is a genuine reason why it was not possible to record the details of a meeting at the time.
Taxable benefit: if the loan is interest-free and exceeds £10,000
- If the overdrawn (debit balance) on a director's current account with the company exceeds £10,000 it is treated as an employment-related loan.
- A taxable benefit will arise on an employment-related loan when the employee does not pay interest to the employer at HMRC's official rate of interest.
- The cash benefit of the interest free loan for tax purposes is calculated by using an averaging method or on a daily basis. There may be a difference between the two methods and HMRC will use the daily basis where a loan balance fluctuates throughout the year.
- The cash benefit is the difference between interest calculated at HMRC’s official rate and the interest paid (if any has been charged).
- The taxable benefit of interest calculated is required to be reported on form P11D.
- A P11D dispensation does not apply as this cannot cover beneficial loan interest.
- Class 1A NICs will be payable by the company on beneficial loan interest, which will also be required to complete form P11D(b).
- The director will be taxed on the benefit received.
- If a company does not write up its transactions contemporaneously it may be difficult for it to accurately determine when this type of benefit arises.
Top tip: if a director is charged and pays interest at HMRC's official rate on loans with a balance in excess of £10,000 this reduces the reporting requirements. It is sensible to work out whether it is cheaper for the director to pay tax on the beneficial loan and the employer to pay the Class 1A NICs on the benefit or for the director to pay interest on the loan. Where the director is a higher rate taxpayer there may not be a difference. In term of reporting, if interest is charged, it is still necessary to report the loan on form P11D however there is no Class 1A for the employer. If the director does not pay the interest you must prepare a P11D and he will need to report the benefit under Self Assessment and this will probably be adjusted for via a PAYE coding which will need checking.