Lending money to your company

If you lend money to your company, the tax effects are as follows:

·         Your company will not pay corporation tax on the money you lend it.

·         If your company pays you interest on the loan, it will need to deduct income tax at 20% from the interest it pays you, and remit the tax deducted on a quarterly basis to HMRC. You will need to declare the interest received on your tax return. Your company can deduct the gross interest paid as a business expense.

Borrowing money from your company

If you borrow money from your company, the tax consequences are more complex. The following notes copied from HMRC’s website cover the basics, but if you are considering this course of action you should seek professional advice before withdrawing funds.

If the loan was more than £10,000

If you’re a shareholder and director and you owe your company more than £10,000 at any time in the year, your company must:

• treat the loan as a ‘benefit in kind’
• deduct Class 1 National Insurance

You must report the loan on your personal Self-Assessment tax return. You may have to pay tax on the loan at the official rate of interest.

If you paid interest below the official rate

If you’re a shareholder and director, your company must:

• record interest you pay below the official rate as company income
• treat the discounted interest as a ‘benefit in kind’

You must report the interest on your personal Self-Assessment tax return. You may have to pay tax on the difference between the official rate and the rate you paid.

Corporation Tax

If your overdrawn loan account has not been repaid nine months and one day after the end of your accounting period, your company will have an additional corporation tax bill to pay.

When the loan is subsequently cleared, your company can reclaim the additional Corporation Tax it has paid. You can’t reclaim any interest paid on the Corporation Tax.

It is not difficult to gauge the focus of our tax collectors. Since the Brexit vote, 23 June 2016, and the change in government leadership, HMRC have published a number of consultation documents, all issued during August 2016. Prior to the Brexit vote, there were a smattering of consultations, but none issued after 23 May 2016.

The focus of the August postings are telling:

·         5 deal with tightening sanctions against tax avoidance and evasion.

·         7 deal with “Making tax digital”

The balance deal with a number of miscellaneous items.

It would seem that the new cabinet, and Philip Hammond in particular, may be considering new powers to tackle the so-called “black economy” and businesses that take advantage of offshore tax shelters to avoid UK taxes.

However HMRC promotes the “Making tax digital” agenda, primarily by arguing that simplifying tax management for taxpayers will ease compliance etc., if small and medium sized businesses are required to file information on a more regular basis, this will provide HMRC with a raft of new data that they will no doubt use to identify tax avoiders.

The recent publicity regarding the use of tax havens by large corporations to shift profits into low tax jurisdictions highlights efforts by the international community to tackle this problem. In particular, the efforts of the OECD to establish country-by-country reporting standards.

Encouraging the estimated 10% of economic activity in the UK that is presently under-declared, and therefore under-taxed, into the light of compliance is another matter. And one that will no doubt be of concern to the Treasury under Philip Hammond’s leadership.

All of those interested in the impact of tax on UK business will be waiting to see how these consultations by HMRC convert into new legislation. Perhaps the autumn statement, due to be released 23 November, will clarify the thrust of tax assessment and collection post Brexit…

Legal responsibilities

We are often asked to clarify the responsibilities that directors take on when they agree to become directors of limited companies. A summary of directors’ duties published on the GOV.UK website are reproduced below.

As a director of a limited company, you must:

• try to make the company a success, using your skills, experience and judgment
• follow the company’s rules, shown in its articles of association
• make decisions for the benefit of the company, not yourself
• tell other shareholders if you might personally benefit from a transaction the company makes
• keep company records and report changes to Companies House and HM Revenue and Customs (HMRC)
• make sure the company’s accounts are a ‘true and fair view’ of the business’ finances
• file your accounts with Companies House and your Company Tax Return with HMRC
• pay Corporation Tax
• register yourself for Self-Assessment and send a personal Self-Assessment tax return every year – unless it’s a non-profit organisation (e.g. a charity) and you didn’t get any pay or benefits, like a company car

You can hire other people to manage some of these things day-to-day (e.g. an accountant) but you’re still legally responsible for your company’s records, accounts and performance.

Another issue that is frequently asked is what information about the company should be displayed on business signs and stationery. From the same source these are:

Signs

You must display a sign showing your company name at your registered company address and wherever your business operates. If you’re running your business from home, you don’t need to display a sign there. For example, if you are running 3 shops and an office that’s not at your home, you must display a sign at each of them.

The sign must be easy to read and to see at any time, not just when you’re open.

Stationery and promotional material

You must include your company’s name on all company documents, publicity and letters.

On business letters, order forms and websites, you must show:

• the company’s registered number
• its registered office address
• where the company is registered (England and Wales, Scotland or Northern Ireland)
• the fact that it’s a limited company (usually by spelling out the company’s full name including ‘Limited’ or ‘Ltd’)

If you want to include directors’ names, you must list all of them.

If you want to show your company’s share capital (how much the shares were worth when you issued them), you must say how much is ‘paid up’ (owned by shareholders).

George Osborne’s summer budget 2015, and the subsequent Finance (No2) Act 2015, introduced far ranging changes to the income tax relief that can be claimed by individual landlords for finance costs.

George believed that property landlords were adding too much inflationary pressure to the UK’s housing stock. To remedy this, he set out to reduce the income tax relief available to buy-to-let landlords; after all, income tax relief for home owners has been denied for many years. It is intended that this levelling of the playing field will enable home buyers to compete more effectively as the demand from marginal buy-to-let investors is reduced.

This change has teeth, sharp teeth. From 6 April 2017, landlords (subject to income tax on their letting profits) will gradually lose the right to claim a deduction for finance costs: these are primarily, but not limited to, mortgage or loan interest payments. In its place, landlords can claim a tax credit based on 20% of the disallowed costs.

At a stroke this will deny higher rate tax relief on the disallowed costs. The reduction is to be introduced in stages starting April 2017 and be fully implemented by April 2020.

The changes also have a rather insidious side effect. Under certain circumstances, basic rate taxpayers will find themselves promoted to the higher rate tax band, and this with no increase in rental profits. Those most at risk are landlords who have borrowed heavily to grow their property portfolios and have high levels of rental income matched by high levels of finance costs.

This article is a repeat of our past exhortations to landlords: start planning for these changes now.

If your circumstances fit the most unfavourable combination of rental income to finance costs the effects on your income tax liabilities could be dire. This point cannot be overemphasised; for no change in your property business profits you may experience significant increases in tax due.

Planning is key. If you are concerned that you may be affected, please call.

Philip Hammond has announced the date for the Autumn Statement: 23 November 2016.

In the past, Chancellors have used the occasion to set the scene for the following years’ budgets. This year, Philip Hammond will be disclosing the fiscal direction of the new Conservative government. Are we to have evermore “austerity”, cuts in government expenditure, or will the Treasury abandon its commitment to reducing debt and balancing UK’s books?

No doubt the economic effects of Brexit will weigh heavily on the argument: can we afford to suppress economic activity if we are facing the loss of the EU single market?

All eyes will be on Philip Hammond as he rises to speak on the 23^rd. A lot hangs on what he says.