Is Writing off Company Loans Tax Efficient?
It is not unusual for directors to find themselves in a situation where you need to write off a company loan in order to reduce tax liabilities. A common scenario may be you have taken a loan from the company to buy supplies or services, but have not recovered enough return on investment to pay back the loan. In such a scenario companies could just pay a dividend to pick up the bill and avoid paying extra tax, but under new HMRC rules this option is more expensive.
So, what are your options? You may consider writing the debt off to negate tax, but this proposal may not be an attractive proposition for shareholders, especially if the annual turnover has not been good. Furthermore, the new employment income regulations bracket loans that are written off by companies as earnings which can ultimately make this an expensive option.
Loans to directors
The alternative is for directors to pay themselves a salary rather than a dividend. The personal tax free allowance for 2013/2014 is £9, 440 so do not pay yourself more than this otherwise you end up paying more in tax and NI contributions. Furthermore do not actually draw the salary, just credit it to directors on the business account so that it shows the debt is cleared. If the salary does not clear the debt you may have to bite the bullet and write the loan off.
Since the taxman put a stop to Corporation Tax on director´s loans companies only have one option to write off a loan without being taxed extra, and that is to make the loan out to a director who is also a share holder so that the loan is taxed in the same way as a dividend.
HMRC may still argue the director´s loan should be subject to PAYE tax and NI contributions, therefore when taking a loan from the company debit it to your loan account. You should then apply for tax relief through Corporation Tax rather than a dividend. You are still permitted to do this with a written-off loan whereas it is not allowed with a dividend even if the company does not have sufficient funds.
Writing off company loans
So what is the benefit of writing off a company loan? Let´s say for example, that you have a loan of £40,000. By writing it off you save the company over £4,000 in tax and NI contributions depending on the total revenue for the tax year. Despite government restrictions to get loan write-offs, they continue to be the most tax efficient choice. Although you will most likely have to pay some tax for writing off a company loan, it is often the best way of reducing the amount of tax payable.
If you would like further advice about ways of reducing tax on company loans contact Taxaccolega, a low fixed fee accountant, firstname.lastname@example.org or call us on 08000 235 234 and speak with a member of our friendly and knowledgeable team.