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We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA

Some P11D and s455 tax considerations

An interest-free loan to an employee (or director) is chargeable to tax if it exceeds £10,000 at any time during the tax year. The amount chargeable is the rate of interest set as the ‘official rate’. Since 5 April 2021, this has been 2% and is charged on the average amount outstanding during the fiscal year.

Any amount written off is chargeable as a payment of emoluments. If the company writes off an overdrawn loan account balance, tax and NICs need to be considered. At the time of the write-off this is treated as if it was a cash payment of earnings for Class 1 NICs purposes, so it needs to go through payroll for NICs.

However, for tax purposes, the treatment is completely different and will depend upon whether the director is also a shareholder and if the loan being written off was previously subject to s455 tax in the company:

  • loans that were subject to s455 tax in the company are treated as dividends for the individual shareholder/director at the time the loan is written off; any tax paid by the company in respect of the loan under CTA 2010, s455 will be repayable to the company nine months after the end of the accounting period in which the loan was cleared
  • loans that were not subject to s455 tax in the company are treated as a taxable benefit and must be reported on form P11D – this is no different from the position for other employees.

If the director does not have the funds to meet the extra tax cost and does not want to meet the additional Class 1 NICs out of other earnings at the time of the writing-off, the amount to be written off will need to be grossed-up. This means that while the write-off is treated like a dividend for income tax purposes, unlike an actual dividend it is not exempt from national insurance contributions. An example to illustrate the cost implications could look as below:

Example

Mrs A is a director and a higher rate taxpayer. The company resolves to write off the balance of £20,000 on her overdrawn loan account and meet any additional costs for her. In order to complete its RTI return, the company needs to arrive at a figure for her gross earnings which ensures that, after deduction of PAYE and employee’s Class 1 NICs, there will be a net amount of £20,000. Of course, Mrs A herself does not receive anything more through payroll. The writing-off of the loan counts as the payment and so care needs to be taken to exclude £20,000 of the net pay resulting from the payroll calculation when other earnings for the same period are paid to her.

If Mrs A is a higher rate taxpayer paying 3.25% (rate is increased from 2% to 3.25% from 6 April 2022) Class 1 primary NICs, her gross pay will be £35,242.29 (£20,000/ (100 – 40 – 3.25) % = £35,242). Employer’s Class 1 NICs at 15.05% of £5,303.96 will also be due to HMRC in respect of the tax month in which the loan write-off took place.

Further, there is no corporation tax deduction for the amount written off (CTA 2009, s.321A).

Loans to participator

The de minimis exemption of £10,000 (above) does not apply to a loan to a participator in a close company. If such a person has a loan or advance nine months after the end of the accounting period in which the advance or loan was made, a charge will arise under s455 Corporation Tax Act 2010 (CTA 2010) which is 32.5% of the amount outstanding.

The benefit in kind charge will not be made if:

  • the loan or advance does not exceed £10,000, and
  • the borrower works full time for the company or one of its associated companies, and
  • the borrower does not have a material interest (5%) in the close company or any of its associated companies.

For the purposes of establishing whether a taxable benefit arises, it is necessary to aggregate all loans and advances. As well as straightforward loans, the following are also regarded as loans:

  • overdrawn director’s loan account; and
  • advances on account of expenses payments; although in practice HMRC disregards advances not exceeding £1,000 provided that the amounts are spent within six months and the employee accounts to the employer at regular intervals for the expenses (ITEPA 2003, ss174–190).

Example

A civil servant was required by his employers to move to London from Wigan. He received an advance of salary which was interest-free and repayable on demand in certain circumstances. It was repaid by monthly instalments over ten years and he was assessed on it. He appealed, contending that he received no benefit from it. This was rejected by the court, holding that the true nature of the advance was a loan from the employer. Williams v Todd [Ch D 1988, 60TC 727]. Further details on advances of expenses can be found at EIM26155.

There are two methods of calculating beneficial loan interest:

  • average basis (based on the opening and closing balances of the loan) and
  • alternative method – calculated on the day-to-day outstanding balance of the loan.

The averaging method automatically applies unless the employee elects for the alternative precise method, or the Inspector gives notice that he or she intends to use the precise method. An example of the calculation using the average method can be found at EIM26311.

If interest is charged on loans over £10k and no benefit in kind arises, the amounts are still reported on P11D.

This ACCA article on how to avoid common errors and omissions when submitting P11Ds is worth looking at before making any submissions.

ACCA’s full guide to benefits and forms P11D is available from our website.