HMRC are currently writing to company directors who, between April 2019 and April 2023, received a director’s loan that has been written off or released or may have not declared the amount as income on their Self-Assessment tax return.
What are director’s loans and loan write offs?
A director’s loan refers to money that a director either takes from their limited company or lends to their limited company, outside of their regular salary, dividends or reimbursed expenses.
When a loan is ‘written off’, this means the company has formally decided that the loan will not be repaid, and consequently removes the debt from its financial records. A loan can then be ‘released’ when a director is legally freed from the obligation to repay it, typically occurring through a formal legal waiver or deed of release.
Why is it an issue?
It is declared in the Income Tax (Trading and Other Income) Act 2005 that if a close company writes off or releases a loan made to a participator, typically a director or shareholder, the entire amount is treated as taxable income for the recipient.
A close company is a term that describes a private limited company that is owned or controlled by 5 or less individuals or by its directors.
HMRC is taking action
HMRC is now actively sending letters to individuals who they have identified as potentially having undeclared income from directors’ loan write offs. The campaign is focusing specifically on loans written off or released between April 2019 and April 2023.
HMRC aim to prompt directors to review their tax affairs and make any necessary disclosures. These checks are not random, and if you receive a letter, it means HMRC has evidence or a strong suspicion that there is income that has not been declared.
I received a letter – what do I need to do?
If you receive a letter from HMRC regarding written off loans, it is important to remain calm, as this is just an invitation to correct your tax affairs. On receiving the letter, you should thoroughly review your company accounts and personal finance records to identify any times where director’s loans were written off or released during the specified period, or any other period.
It is highly recommended that you consult a qualified tax advisor as this can be complex and risky if you attempt it on your own.
Further considerations for director’s and employee loans
There are additional tax and national insurance implications that may need to be considered in respect of loans to directors and employees that are outstanding, released or written off, such as the following:
- Employer’s and employee’s National Insurance (NIC) should have been charged through Pay As You Earn (PAYE) on the value of the loan written off.
- If the loan(s) was an interest free or low interest loan(s) (below the HMRC official rate of interest at the time) exceeding £10,000 in a tax year, as this would result in a loan benefit liable to income tax for the individual and Class 1A NIC for the employer, and should have been disclosed to HMRC by submitting Forms P11D for each tax year in which there is an interest free or low interest loan balance exceeding £10,000.
- Where any loans to participators were outstanding at the company year end and not repaid within 9 months, a section 455 corporation tax charge should have been paid by the company in respect of the outstanding balance. This tax charge can then be reclaimed by the company repayable 9 months after the end of the accounting period in which this loan was repaid, released or written off.
Steps to take
For loans written off between April 2019 and April 2023, this falls in HMRC’s current campaign, and you can make a disclosure using the digital disclosure service (DDS).
For any loans that were written off or released before April 2019, a tax advisor can make those claims on your behalf.
The DDS service can also be used to declare for periods before April 2019, and proactively making a disclosure before HMRC contacts you may help reduce any potential penalties.
For loans since 6th April 2023, the relevant tax years generally remain within the allowable amendment window for Self-Assessment tax returns and therefore should be made by directly amending the applicable tax returns instead of using the DDS service.
We can help you
Get in touch with a member of our expert tax team today if you seek assistance in correcting your tax affairs.
