With the Contracting sector in a very positive and optimistic place, it is easy to see why many Independent Professionals are seeking to operate through their own Personal Limited Company, particularly those who have seen a contract renewal for the foreseeable future.
Director’s Loans are not a feature of the Umbrella Company Solutions, but they can be quite common with Private Limited Companies.
In this piece, our Managing Director, Gerard Kiernan, provides insight into this frequently asked question and the consequences that surround a Director’s Loan.
“My company has a lot of cash in it, can I give myself a loan?”
Like many answers in Tax and Accountancy, the answer is both Yes and NO, but, unfortunately for the majority of Professional Contractors, it is a NO.
Firstly, we’ll examine and explain a Director’s Loan from a Director to the Company.
In this scenario, there is generally no issue, and the company can repay the money to the director at any time permitting the company has the funds to repay. The most common time that a Director will loan money to a company is at the time of start-up, however, Directors often use a Director’s Loan to diversify or expand their business.
Secondly, we’ll examine the scenario whereby a Director wishes to take a loan from their company. In this scenario, if the company has a cash balance and wishes to give the Director a loan, there are potential implications around both Company Law and Revenue Guidelines.
Under Section 239 of the Companies Act 2014, it is generally prohibited for a company to give a loan, the main exemption to this is that if the loan represents less than 10% of the company’s net assets. Therefore, if the net assets value of the business is €200k, then it is possible for company to give a Director a loan to the value of no greater than €20k.
Failure to comply with Section 239 may give rise to prosecution as a Company Director.
Taxation Rules & Revenue Guidelines
Should a loan be made by the company to the Director, there are two types of tax you need to consider, Income Tax and Corporation Tax.
Company loans made to Directors will be liable to BIK, considered as a preferential loan for BIK purposes.
If the loan is for the purchase of a home there is a reduced BIK of 4%, for any other loans the BIK rate is 13.5%.
In the example above the loan of 20k @ 4%, would result in a BIK Charge of €800, this would incur a tax charge of up 52% of this figure which would result in a €416 cost.
If the loan is to be treated as salary, then this would mean a 52% charge on the loan, and it is re-grossed to the original value pre-tax.
An example of this is demonstrated with a loan of €4800 ‘being re-grossed’ would equal €10,000 gross salary, which in turn, would result in tax of €5200, less than appealing to say the least.
You must declare the Director’s loan as part of your Corporation Tax Return. This will incur a charge of 25% of the loan amount in Corporation Tax. Using the example above of a €20k loan from company to director, the Corporation Tax Return will have an extra charge of €5,000.
If the loan is repaid within 4 years, you can reclaim a refund on this tax paid.
To summarise, for Professional Contractors working under Irish Company Law, the most common way that a Director’s Loan account will be overdrawn is a direct result of using the company funds for personal expenditure.
To avoid Director’s Loan issues and to comply with Revenue and Company Law guidelines, your accountant will have to treat this expenditure as salary and re-gross the amount, often making it more expensive!
Our advice to clients is to only use the company account for genuine business expenditure.
For best practice, we also recommend reconciling your accounts each month to identify any potential liabilities at source rather than uncovering them at the time of your Corporation Tax Return.
Whilst it may look like a great idea at the time to take a loan from Company funds, the tax and legal implications indicate it’s not usually a great idea and often, a very expensive way to spend money!