If you’re a company director and you've ever borrowed money from your own business and that loan was later written off, there's something important you need to know.
HMRC is now writing to directors whose loans may not have been reported properly on their personal tax returns. These letters relate to loans that were outstanding and then written off between 6 April 2019 and 5 April 2023. While the letters are addressed to individuals, the implications can quickly extend beyond the director’s personal tax affairs and affect the company too.
Even if you haven’t received a letter, this is a good moment to stop and ask: Are your director loans fully tax-compliant?
Director loans are more than just internal transactions. If you’ve taken money out of the business and not repaid it, HMRC may treat that loan in the same way as income, and tax it accordingly. This can result in extra income tax for the individual, and potentially, additional charges for the company.
The concern for HMRC is that loans could be used to avoid income tax, especially if they’re never repaid. That’s why loans that are eventually written off, meaning the company no longer expects to get the money back, are now under much closer scrutiny.
If a company lends money to a director without charging interest or charges below the official interest rate, it can create a taxable benefit for the individual which needs to be reported.
The director is usually responsible for any income tax that arises, while the company will have to pay Class 1A National Insurance. This is typically reported via a P11D form each year.
If a company releases a director’s loan, that amount can be taxed as if it were earnings. This brings a different set of tax obligations, including Class 1 National Insurance, which is paid through the payroll by both the director and the company.
However, if the company is classed as a ‘close company’ (one controlled by five or fewer people), and the director is also a shareholder, the written-off loan may be treated as a dividend rather than a salary. That could mean a lower tax rate for the director, but the distinction isn’t always clear-cut. Whether the loan is taxed as salary or as a dividend depends on the reason it was written off and the individual circumstances, and HMRC looks closely at this.
On the company side, there is a separate issue to consider. When a close company lends money to a director or shareholder and the loan isn’t repaid within nine months of the end of the accounting year, the company may have to pay a special tax called a section 455 charge.
This charge is equal to 33.75% of the outstanding loan and is paid to HMRC. It can eventually be reclaimed but only once the loan is repaid or formally written off. If the company failed to report or pay this charge in the past, HMRC can still demand it later, along with interest.
It’s also worth noting that where a loan is written off, the company is not allowed to claim a corporation tax deduction on the amount. In other words, writing off the loan could create a double tax hit: the company pays the section 455 charge and loses a potential deduction.
If HMRC has contacted you about a director’s loan that was written off, do not respond without fully understanding the wider implications. You should first review how the loan was treated on your personal tax return, and whether the correct steps were taken by the company. We highly recommend consulting with a qualified tax professional in the first instance.
In many cases, directors might not even realise that a loan has been released. For example, if a debt is transferred to someone else, or quietly cleared off the books, it could still count as a release in HMRC’s eyes.
Companies should also take a step back and ask whether they have proper systems in place to track director loans, interest payments, and repayments. Do you know if any loans fall under the section 455 rules? Has interest been physically paid, or just added to the loan balance? Are there any older loans that have been written off without being reported?
If any part of this process has been handled incorrectly, it’s not just the director at risk, HMRC could choose to investigate the company too.
Whether you’re a director with a written-off loan or a business owner managing these issues on behalf of your company, it’s important to seek professional tax advice. Responding to HMRC without a full understanding of the tax implications could potentially make things worse, not better.
A coordinated approach between the director and the company is often the best way forward. With the right guidance, it’s possible to correct past mistakes, minimise penalties, and bring both personal and corporate tax affairs up to date.
We specialise in navigating complex tax rules, so if you need help or just want peace of mind, our team can help so get in touch.
