One of the advantages of owning your own business is the capacity to utilise a different taxable entity (now and again) to move money and borrowings back and forth for different monetary purposes.
While this may well sound like a useful thing, it isn’t always as straightforward as it may seem. This article will walk you through some of the more common traps that entrepreneurs experience when utilising this valuable tool.
Such borrowings, while allowed, should be deliberately organised to maintain a strategic distance from charge responsibility issues as examined in this article. Prior to undertaking these means, exhortation from a decent bookkeeper and corporate lawful direction would be basic.
There may be times where you need to borrow money from your own limited company, or you may have done so unintentionally whilst drawing down funds. What are the tax implications of doing so?
Borrowing money from your own company
It’s not uncommon for business owners to need a bit of extra cash from time to time. After all, unexpected expenses can pop up at any moment.
When this happens, some business owners may be tempted to borrow money from their own companies. However, there are a few things to consider before taking this step.
Practically speaking, numerous workers for hire acquire cash from their business, some for generally brief timeframes, while others will borrow large amounts for an extensive stretch.
On the off chance that you are slanted, out of the blue, to acquire cash you should initially consider whether you are leaving sufficient money in the organisation for it to pay its liabilities, particularly charge bills, on schedule.
Even though it is rarely done, as a director, you should record the advance taken, and the conditions of the credit, in a Director’s Resolution. Albeit just administrative work, it serves to record the advance when it is made.
Under the Companies Act, a credit over £10,000 typically requires the convention of shareholders or investors’ endorsement.
Can a Limited Company lend money to an individual
A limited company can lend money to an individual, but there are a few things to consider before doing so. First, the interest rate charged on the loan should be at or below the market rate to avoid violating tax laws.
Second, the loan should be for a legitimate business purpose, such as investing in equipment or expanding the business. Finally, the loan should be structured in such a way that it does not put the company at risk if the borrower defaults.
When all of these factors are taken into account, lending money to an individual from a limited company can be a sound business decision.
How to legally take money out of a limited company
Directors of limited companies can withdrawn money in the Following Ways:
- Director’s salary, expenses and benefits
- Director’s loan
The careful use of a combination of these methods can be an extremely tax efficient way to minimise personal tax liabilities and run a business.
This is due to the fact that corporation tax is payable at just 20 percent, while income tax on earnings over £50,001 (with the £12,500 personal allowance) sits at 40 percent.
What taxes will the company be liable for?
The company also brings about a secondary National Insurance (NI) cost of 13.8% of the estimation of the benefit in kind.
Assuming the credit stays exceptional for an extensive stretch of time, the organisation may get responsible for an extra instalment of Corporation Tax. On the off chance that you are a chief or potentially an investor you are known as a Participator. In the event that any advance at year-end to a Participator, or a partner of a Participator, stays remarkable 9 months and 1 day after the finish of the organisation’s bookkeeping time frame will imply that the business should pay a measure of Corporation Tax equivalent to 25% of the sum as yet extraordinary.
The instalment of Corporation Tax can be recuperated when you reimburse the advance back to the company. The reimbursement isn’t made by HMRC until 9 months and 1 day after the finish of the bookkeeping time frame in which the advance is reimbursed to the firm. On the off chance that you reimburse part of the advance, a proportionate piece of the Corporation Tax paid is reimbursed.
What occurs if your business writes off a loan?
New guidelines came into effect in 2013 that continue to influence how loans are dealt with in the event that they are reimbursed and ‘supplanted’ with new advances.
Assuming the advance is discounted and never reimbursed to the business, the measure of the advance will be treated by your relationship with the firm.
In the event that you are an investor and a chief (the typical circumstance for restricted company workers for hire) the discounted sum is treated as a dispersion and no duty alleviation is acquired by the organisation. Notwithstanding, albeit the business sum is treated as a dissemination for annual expense that isn’t the situation for NI. The NI cost would be a derivation from benefits for the organisation.
In the event that you are just a chief, the discounted sum is treated as the net of duty pay and netted up to ascertain PAYE and NI. The organisation would then be qualified for deduct the gross sum and business’ NI from its benefits and get charge alleviation.
We suggest that you address your bookkeeper prior to writing off any advances, so that you can choose the most ideal path forward.
Steps to Avoid the Danger
To maintain a strategic distance from productive profit/appropriation treatment, the proprietors of a company ought to notice certain customs when making withdrawals. Where conceivable, the entirety of the accompanying ought to be never really advance treatment.
In the first place, the withdrawal ought to be archived as an advance and a lawfully enforceable promissory note should exist. Substantial corporate minutes should exist approving the credit.
Secondly, premium ought to at any rate be accommodated at the relevant government rate. Security ought to be given where suitable.
Next, the exchange ought to be appeared as an advance on the partnership’s books and records. It ought to be recorded on any fiscal reports of either the investor or the enterprise.
Lastly, reimbursements ought to be made as per the particulars of the promissory note. An interest credit ought to be reimbursed inside a sensible measure of time. Little reimbursements and proceeded with development of the advance, or full reimbursement toward the year’s end trailed by restoration of the advance toward the start of the following year, don’t show a genuine debt holder bank relationship.
What if my company owes me money?
The thing that archives all money you pay into your company and all funds that you withdraw from it, is known as a Director’s Loan Account. A limited company is in fact a separate legal entity to its owners and directors, and therefore the Director’s Loan Account actually forms part of your business’ accounting system.
Upon starting a new business venture, you may find that you have to input a capital payment and use your own personal funds in order to do so. This information will be documented within the Director’s Loan Account. It’ll also keep track of any and all other personal payments that have helped to cover business expenses. Transactions such as these are known as a type of loan to the company, and you’d usually expect to get the money back at some point, further down the line.
Borrowing money from your own business can be a useful financial strategy when managed prudently and in compliance with legal and tax regulations. It offers flexibility and can provide a source of financing for various personal and business needs.
It’s imperative for company directors to exercise caution and transparency when engaging in such transactions, maintaining clear records and adhering to established borrowing policies.
Proper documentation, clear repayment terms, and adherence to legal and tax requirements are crucial to ensuring that borrowing from one’s own business remains a viable and sustainable financial option while safeguarding the integrity of the company’s finances.
Always consult with financial professionals and tax advisors to make informed decisions about borrowing money from your own business.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.