I have a client who set up Ltd and wants to invest £50K. Question is about tax implications. If he was to invest that amount as a loan and then when company makes some profit, after some time, the loan can be repaid to him in instalments - interest free, will he be paying any tax as a director, personal accounts? Does he have to have an agreement to how much it will repay every month?
After the first year - the company will show loss if funds are not repaid?
I think I know that answer but would appreciate help.
Hi Magda
So hows about an intro before we start. We always ask newbies!
Usual stuff - what prof body do you belong to, do you work for yourself or in a practice/ firm, are you a bookkeeper or accountant, what qualifications, how long in role, where up to in your studies-what exams passed/with what body/in midst of doing, where based, what you did before this role? That sort of thing. Helps get to know you but also how best to pitch answers.
When you say you think you know the ansewr - how about having a go and we can tell you if you are right or wrong.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I am self employed accountant technician - have AAT qualification and I am MAAT. I work with accounts for the last 3 years, and I am fully qualified Polish interpreter as well. I have private clients and work for companies as well. I love what I do, love numbers and every client is different. I live in Birmingham.
Knowing the answer to my question - director invested his own money so until he makes any profit, whatever repayments he receives (still interest free) there is no tax on it as there is no profit. the same with the company.
I am looking forward to see if I am on right tract.
Following on from John's Q - have a think about your double entry for this one on the loan set up and repayments. Sorry, we are making you work for this one arent we (but its the best way to learn, I think!)
The question is - should the Director (and Im assuming he is a shareholder as well) be charging the business interest on the loan? Plus also, will the company have the resources to be able to start repaying him in the short term?
-- Edited by Cheshire on Wednesday 6th of September 2017 02:53:51 PM
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
The question here is another one of those that causes some confusion amongst directors as they have invested money in the business they believe that they can repatriate it without any tax implications... But there (sort of) is...
Nicely simplified in this case by there being no interest so we'll just emphasise here the tax situation with the capital injection.
Director invests £50k in the company. Goes straight to the balance sheet. No probs (Increase in bank and liabilities). Everyone's happy.
Think how they get that money back again. It has to be from reseerves (already taxed) or profit (tax will be due). Therefore you will at some stage go through the conversation that I've had many times where your client cannot understand why they have to pay corporation tax (although no personal tax) on repatriation of money that they loaned to the company.
Thing is, they have actually got all of their money back but trust me, they seldom see it that way for starters as they think that it should be some form of cost of sale rather than a distribution of post tax profit.
Have fun with that one! I had a particularly interesting almost fisty cuffs one where the director had withdrawn a smaller amount than you are talking about and assumed that he had now made no profit because the company owed him that money.... Maybe, but it owes HMRC first.
Oh, and welcome to the forum Magda.
kindest regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I've not had the problem of explaining that sort of thing to a client but I find that the simplest way to look at it I think is this.
Lets assume that the Company makes 100k of sales and it costs them 50k in taxable expenses. A 50k profit is made. That profit is taxed at 9.5k, which leaves them with just over 40k.
What the Director has to appreciate is that even without that loan, the company would have to pay 9.5k on the same amount of profit.
The Director can then be repaid any amount up to 40k without any further tax implications. That's what's available to be repaid, not 50k. The Director hasn't paid tax on his/her loan, the Company have paid tax on their profit
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Hi guys sorry if I'm hijacking the thread. I just wanted to ask, wouldn't the tax implications on the directors loan depend on the relationship of the loan to the company? For example if the loan is for trade (excluding property development) it should be paid post tax, and non trade loan paid pre tax.
I was under the impression that a loan to the company for the purpose of generating an income would be classed as a trading loan. Tax due on the income prior to director being paid back the loan.
Loans used to finance a company before trading would be non trading loan, loans by a director for the purposes of property development would be classed as non trading loan also. Meaning the loan can be repaid back before tax is due on any profits.
Im typing on a phone so sorry if I'm not getting it right, but it's quite an interesting topic.
I was under the impression that a loan to the company for the purpose of generating an income would be classed as a trading loan. Tax due on the income prior to director being paid back the loan.
Loans used to finance a company before trading would be non trading loan, loans by a director for the purposes of property development would be classed as non trading loan also. Meaning the loan can be repaid back before tax is due on any profits.
Hi Martin
I am by no means an expert in Companies or loan relationships but are you just talking about the interest on these loans being allowable or do you think that all of the loan should be allowed to be paid before tax?
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
I consider everyday a school day, so please be gentle with me if I'm misinterpreting the way a director's loan to a company should be treated before it is paid back.
Apologies, I didn't read the Q properly as I missed the word 'relationship' when you mentioned trade loan, also I was on the midnight deadline for Vat! Now due in a meeting at 8, but briefly, my understanding
The OP didn't say specifically what the loan was for so we can't say if it was trading or non trading. She also stated interest free.
Pre trading loan doesn't made it a non trading relationship loan, does it? Ignoring property, surely that is if share purchase type deals are involved.
So my question back to you would be how can the loan repayments themselves be classed as an expense allowable pre tax, when it is just repayment of existing debt, just as a trading real loan from a bank would be.....the capital repayments are not allowable are they?
I think the question around trading real is a wee bit broad here.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
