Budget announcements on corporation tax
Whilst decreases in the rate of corporation tax had already been announced from 20% next year to 19%, effective from 2017, and 18% from 2020, the Chancellor announced in last week’s Budget that the 18% rate would be reduced further to 17% and apply from 1st April 2020.
This, of course, was welcome news but on the flip side of the corporation tax coin was the announcement that the corporate charge (s.455 charge) of 25% on loans to participators will rise from 25% to 32.5% as from 6th April 2016, so as to prevent an unfair tax advantage being obtained by taking a loan from the company rather than salary or a dividend.
Loans and advances to close company shareholders give rise to a tax charge on the company, unless the loan is:
- Made in the ordinary course of the company’s trade; or
- The loan (together with other outstanding loans to the borrower) does not exceed £15,000 and is made to full-time working directors or employees who do not own more than 5% of the share capital.
Any loans that do not fall within these exceptions must be reported by the company to HMRC not later than 12 months after the end of the accounting period in which the loan is made. Furthermore, the company must pay tax at 25% on the amount of the loan or overdrawn account balance nine months after the end of the accounting period in which the loan is made. The tax is refunded by HMRC once the loan is repaid to the company and only then nine months after the end of the accounting period in which the loan repayment falls.
To avoid having to pay the tax completely the loans should be repaid to the company within nine months after the end of the accounting period in which the loan is made.
Example
The director of a PSC with an accounting year end of 31st December has an overdrawn loan account of £25,000 as at 31st December 2014. The director repays the loan on:
(a) 25th September 2015
Since this is before 1st October 2015, when the company is due to pay its corporation tax for the year ended 31st December 2014, the company will not have to pay tax at 25% on the loan.
(b) 2nd October 2015
Since the loan has not been repaid by 1st October 2015, the company must pay tax on that date at 25%, i.e. £6,250, and cannot claim repayment of the tax until 30th September 2016.
The tax is a ‘stand-alone’ charge and is not deductible from the corporation tax payable on profits.
Loan write offs
Where a company releases or writes off a loan, then the company can reclaim the tax paid.
Loans to contractors can be a useful way of using a PSC’s money as it is possible to borrow up to £10,000 for up to 21 months’ tax and NIC-free, which is cheaper and easier to arrange than a bank loan. Care and advice must be taken first before doing so. Freelancers should also be aware that there are anti-avoidance provisions to prevent loans being repaid and the funds re-borrowed to prevent a s.455 charge.
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