This week we are going to look at the tax implications of taking a loan from your company. We will look at
- Setting the scene
- Company Tax
- Benefit in Kind [BIK]
- Loans not caught
- Can Teddy do better?
Setting the scene?
Teddy Moore set up a new company in February of 2020 called Getmoore ltd. He is a carpenter and has 4 employees. He owns 100% of the company. The company is a subcontractor to a couple of larger builders. Teddy is a bit disorganised, and he took an extra €4000 per month from the company, in addition to his salary. He did this for the last 4 months of 2020. He used the money for general living expenses and a few bits for Mary.
At the end of 2020, he owes €16,000 back to the company. He has an overdrawn director’s current account. He is not aware of the tax implications. It is now September 2021 and Teddy is under pressure. His short suffering accountant Bob wants to meet him to get his accounts signed off and to go through the taxes. Teddy would rather put hot needles through his eyes but agrees to meet Bob.
They meet up and do the usual elbow bump and a quick chat before they get into the figures. The company had a trading profit of €30,000 for the period ended 31 December 2020. The corporation tax bill on this at 12.5% comes to €3,750 and Teddy is ok with that as he was paying a lot more tax as a sole trader.
Bill confirms to him that the overdrawn director’s current account is liable to Income Tax. The loan is grossed up by the standard tax rate and 20% of that figure goes to Revenue.
|Gross up at 20%||[divide by 8 and multiply by 10]||€20,000|
This is a way of making something easy complicated! To keep things easy, apply a 25% rate to the balance of the loan and we come up with the same figure.
Teddy is not happy with this as he is short on funds in the account as he is waiting on a few payments to come in. Why wasn’t he told about this earlier? Bill reminds Teddy that he asked for his accounts in February, March, April, and May and never got a reply. Also, Bill has seen Mary, Teddy’s better half, flaunt her new Luis Vuitton bag down at the reopening of the local! Living expenses my eye!
So, Getmoore Ltd will have a corporation tax liability of €3,750 and an Income Tax liability of €4,000. This is due on the 23rd of September 2021. Bill confirms that once the loan is repaid then the company can request a refund of Income Tax. Let’s assume that Teddy pays back €8,000 by the end of 2021. Getmoore Ltd would be due back €2,000. We as advisors need to be aware of the time limits to get the Income Tax refund. There is a 4-year time limit to claim the tax back. If Teddy paid the balance of the loan back in 2022, the period to claim back the Income tax balance is by the end of 2026.
Benefit in Kind [BIK]
The meeting has taken a bit of a downturn since Bill mentioned the Income Tax issue. Teddy’s mood has soured a bit. Bill is on a roll and continues to worsen Teddy’s mood. He mentions that Teddy has to pay BIK on the loan. As the loan wasn’t used for the purchase, repair or improvement of Teddy’s home, then the interest rate is 13.5%. As Teddy gets an interest-free loan from his company the interest-free bit is liable to BIK. The set rates of interest are
- 4.5% where the loan is for the purchase, repair, or improvement of your principal private residence or
- 13.5% where the loan is for any other purpose
In this case, as the loan was to fund general living expenses, the rate is 13.5%. Bill calculates the BIK as follows
|Rate of BIK||13.5%||€2,160|
|Loan is for 4 months||4/12||€720|
The BIK should have been on Teddy’s pay for 2020, but it wasn’t. To capture the BIK it should go into Teddy’s Income Tax return for 2020. This will ensure that Revenue collects Income Tax and USC on it. They will miss out on the PRSI if it goes in the Schedule E section of the return. If it goes in as “other income” the PRSI will get captured.
If the loan is still there in 2021 then BIK will continue to be an issue. It should go through the payroll for Teddy.
Loans not caught
The loan is not caught by the Income Tax provisions mentioned above. This is where the loan is to an employee or director and all the following apply
- the amount of the loan from the company, or associated companies, doesn’t exceed €19,050
- the borrower works full-time for the company or associated company
- the borrower doesn’t have a material interest in the company or associated company
Included with the borrower is the spouse or civil partner of the borrower. A material interest is when you own 5% or more of the company. In the above scenario, the value of Teddy’s loan is less than €19,050 and he works full-time for the company. But as he owns more than 5% of the company, he has a material interest and so his loan is liable to Income Tax.
Can Teddy do better?
Yes, but what? If the accounts of Getmoore Ltd get sorted early in 2021 then Bill can identify the tax issues earlier for Teddy. If Teddy repays the loan before the tax return filing deadline this avoids the Income Tax charge. This is the tax deadline for the company, being the 23rd of September 2021. If you don’t have a 31 December year-end it will be by the 23rd of the 9th month after your year-end.
How can Teddy repay or reduce the loan? He could
- Declare a bonus and the net of tax bonus would reduce some or all the loan. If we assume Teddy is on the 52% tax rate a bonus of €33,333 would leave a net of €16,000. If that bonus was put through before the end of June 2021 it could go into the 2020 accounts and reduce the profit. This would reduce the corporation tax liability
- Check if the company owes expenses to Teddy. Teddy may have mileage and subsistence claims to make and the value of these could reduce the value of the loan
- Not take his salary for a few months so these net payments would reduce the loan over time.
Teddy and Bill need to have better communication. If Teddy is doing something in the company and is unsure if there are tax implications, then pick up the phone to Bill. No use giving out after the fact! If Bill offers a bookkeeping service Teddy should consider using this. It would help to ensure that
- Director’s loans are visible during the year or very shortly after year end
- Good internal communication between payroll and bookkeeping to capture the BIK
- Stop the BIK when the loan is repaid
- Accounts are done early to identify bonus and repayment opportunities before the tax deadline
- All figures and information in one place, to ensure maximum visibility of the numbers
This would help Teddy and balding Bill. Bill envies the postman who comes whistling into the office every morning.
We are in the thick of Corporation Tax return filing season with the 23rd of September looming large. Accountants are under pressure to get the Corporation Tax returns in on time. In some cases, the Income Tax payments issue, mentioned above, is missed. It’s important to get these things right and not to forget to claim back the tax when the loan is repaid. There are company law provisions too. Ger has highlighted these in an earlier blog that he did on this topic. See here. You can help yourself, and help your accountant, by having a quality accounting function. We are there to help you, but you must want help and realise that it will keep more money in your pocket.
Interested in talking to us? Call Deirdre on 051396703 or start here. Tell us a bit about you and your company and we will see if we can help.