What is Disguised remuneration and the Directors Loan Account
For the majority of our clients, the anti-avoidance rules covering disguised remuneration applies to a director of a close company. In this context disguised remuneration, describes income received by a director which has not been taxed. Potentially this can be achieved by providing a loan from the company to a director, or a person connected to the director. The loan may be given under formal agreement between the company and the director, but the rules apply equally where the director has an overdrawn loan account, meaning the director owes money to the company.
The potential was that the loans are never paid back by the director, therefore benefitting from tax free income.
Disguised remuneration loans taken out since December 2010 which were not repaid or settled by 5 April 2019 will generally be subject to a loan charge, although there are a few circumstances where the loan charge is not applicable.
There are 3 aspects to tax to consider on loans paid to a director - Corporation Tax, Income Tax and class 1a National Insurance.
Any loan which is outstanding at the company's year end must be disclosed in the company accounts. If the loan is not repaid within 9 months of the year end a S455 tax payment equal to 32.5% of the loan value must be paid by the Company. However, the tax can be reclaimed by the Company once the loan is repaid.
Income Tax and class 4 National Insurance:
Loans which exceed £10,000, may give rise to Income Tax and National Insurance liabilities if the loan is offered on low or interest free basis. The charges are based on the deemed value of the interest not paid by the director. This must be disclosed on the P11D and paid by 19 July after the tax year, and disclosed on the directors self-assessment return.
Although this article illustrates the impact on a director, it is equally applicable to loans provided to employees.
Feel free to contact us if you are concerned over disguised remuneration or would like more specific information.