Company directors who have had a loan written off between April 2019 and April 2023 are the focus of this latest campaign, which intends to examine the income tax and national insurance implications of these balances.
Directors’ loans in close companies (a company with five or fewer participators) have always been treated as income when written off. This is in addition to the refundable “loans to participators” charges companies incur when a loan is left unpaid nine months after the end of the company year.
However, what is often neglected, are the personal tax obligations on loans provided at a favourable interest rate which is lower than the official rate (at time of writing, the official rate is 3.75%). A low interest loan is a benefit in kind and will attract tax based on the difference between the official and the actual interest rate charged. When a loan is not reported on a P11D, there is an underpayment of income tax for the individual and class 1A national insurance for the company. Once penalties and interest are factored in, this can become a costly error for the individual and company concerned.
While this increased scrutiny should encourage all directors to review their tax affairs and seek advice if at all uncertain about their position, it also invites a far broader conversation about the treatment of these loans in the compliance cycle. Companies and directors alike should review their procedures and consider whether they have done enough, not only to satisfy HMRC, but to protect themselves from unexpected charges.