Who knows better than you about the financial issues your business is going through in Covid? This is the best time to seek improvement in your business’ cash flow using a Directors Loan. It is equally beneficial for you and your company. Let’s see how?
What is a Directors Loan?
A loan taken from a director to help a business generate more cash flow that is repaid within a certain timeframe. This loan can also be lent to a director by the corporate company.
Issues to consider while lending a Directors Loan:
There are some issues which you should consider before making a final decision. As if you’ll handle these issues effectively, you’ll, definitely, improve your cash flow.
1- Create a formal agreement:
Generally, there is no need for any formal agreement before lending a loan to your company. But to avoid future conflicts and for formal consent, you are advised to create an agreement. It should clearly indicate the rate of interest and the repayment date.
You can claim interest on it or can make it interest-free as per your wish. For the company, the interest will be counted as a general expense and it is considered a personal income for you.
2- Income tax deductions by the company on interest payments:
In case if the loan term exceeds a year, the company will deduct basic rate tax from the annual interest rate.
Applying a CT61 quarterly return policy, the company is liable to pay income tax on a quarterly basis, based on the amounts received and paid in a particular quarter.
You can get the full details on CT61 returns in Part 15 of Chapter 15 in the Income Tax Act 2007.
- The interest a director is going to receive is his personal income and must be reported to the director’s self-assessment tax return and he’d be taxed accordingly. In case if the company retains tax on annual interest paid, the credit would be provided to the director.
- If an individual borrows money to lend it to a company, he is exempted from the interest on the loan provided if:
- He/she is working for the company and contains some ordinary shares.
- He/she holds at least 5% of the total share capital as per the rules of shareholding of associates and the loan should be a qualifying loan.
- If your loan is unable to be recovered, you may claim capital loss relief in accordance with S253 TCGA 1992 under the rules of relief for loans to traders.
What is a qualifying loan?
A qualifying loan is such a loan that is used to attain qualifying shares in a close company, not in a close investment holding company. Secondly, it should be given to a company that’s running a business. Thirdly, it can be used to repay another qualifying loan.
Being a witty person, you should know that your company’s growth is directly proportional to your own success. Therefore, you should obtain a “Director’s loan” to grow collectively.
However, you need to be smart enough to sort out the issues of agreement, tax deduction and implications you may face while getting it.
We hope that this blog post will be helpful for you to learn how the director’s loan is imperative for the improvement of your business cash flow.