Companies wishing to ensure the highest standards of corporate governance are advised to pay close attention to new rules relating to company loans to directors. Previously, directors repaying such money within nine months of the end of their firm’s accounting period could avoid a tax charge. But in this year’s Budget came the announcement of new rules designed to combat what HMRC calls “bed and breakfasting” – the abuse of company loan rules.
More specifically, “bed and breakfasting” entails a director borrowing money from their company, repaying it to avoid the corresponding tax charge and then borrowing the money again shortly afterwards. Close companies are liable to a tax charge for their accounting period where they have lent money to directors/shareholders, that charge amounting to 25 per cent of what is owed by the director at the end of the financial year. However, should the money be paid back within the next nine months, this money can be repaid. But this tax bill can be reduced or eliminated if the directors uses bed and breakfasting.
Good corporate governance in this area therefore depends on an appreciation of two new anti-avoidance rules: the 30-day rule and the intentions and arrangements rule. The former rule means that should a director repay more than £5,000 of the money that the company has lent them, and less than 30 days following this re-borrows in excess of £5,000, the reduction that is ordinarily permitted in the 25 per cent tax charge will be restricted by whichever is lower, the amount repaid or the amount borrowed.
The intentions and arrangements rule involves the reduction in the 25 per cent tax charge being restricted in a similar manner to the 30-day rule, where the director owes £15,000 or more, he has fully or partly repaid it and at the time, arrangements had been made by the director to re-borrow the money from the company, or they had the intention of doing so.
There are various ways for a company to being hit by these rules as part of their corporate governance procedures. First of all, the director/shareholder should reduce the amount that they owe to their company to no more than £5,000 no later than nine months after the accounting period has ended. Ways in which they can do this while being unaffected by the new avoidance rules in the event of their re-borrowing the money include taking extra salary, a bonus or dividend that is credited against the debt instead of being paid out to them.
If, by the end of an accounting period, more than £5,000 is owed by the director to the company, they should reduce the 25 per cent tax charge by repaying the money within nine months. However, prior to borrowing more from their company, they should allow more than 30 days to elapse. Such measures are central to good corporate governance, following HMRC’s latest clampdown in this area.