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Borrowing money from your company? The rules are changing

The 2013 Budget announcements included a brief summary of proposed changes to the tax rules if you borrow money from your company. The draft legislation has now been published and it is complicated.

The new rules will give extra unexpected tax bills if you do not apply the rules correctly. They relate to all loans made to director/ shareholders on or after 20 March 2013.

The previous rules said that, provided a loan made by a company was repaid within nine months of an accounting period, there was no tax to pay by the company. This enabled a director to repay the loan one day and then borrow it back the next without any tax consequences for the company.

If the loan was outstanding for more than nine months, the company paid additional Corporation Tax of 25% of the value of the loan to the Revenue. This could then be reclaimed once the loan was repaid, but this would not be made until nine months after the accounting period in which the loan was repaid.

There are four changes to the new rules and these may affect the date when Corporation Tax needs to be paid.

1. Thirty day rule – for loans of up to £5,000 
If a loan of £5,000 or more is repaid to the company, but within 30 days another loan of £5,000 or more is borrowed by the same borrower or an associate, such as a spouse.

The loan repayment is ignored and the original loan is treated as continuing for the purposes of calculating the Corporation Tax charge.

Tax is then due on 25% of the value of the loan.

2. Intention or arrangements in place – for loans of more than £15,000
The rules are even stricter for larger loans.

For a loan of £15,000 or more, the thirty day rule is ignored if, at the time of the repayment of the first loan, the borrower intends to borrow again from the company or has arrangements in place to do so.

If those later loans are made, they are treated as a continuation of the first loan.

Tax is then due on 25% of the value of the loan.

3. Using a third party
Loans made to LLPs or partnerships in which the director is a partner are treated as if the loan was made directly to the director.

This also applies if the loan is advanced to a trust of which a director is a beneficiary, or potential beneficiary.

4. Conferring a benefit
There are additional rules relating to partnerships that have a corporate member.  It is unclear how the rules will apply in these circumstances.

Please talk to us now if you have borrowed funds from your company.

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