When a director borrows money from their company for personal use there are a number of legal and tax issues to be considered.

Directors’ loans and the Companies Act 2014

The Companies Act 2014 prohibits directors or connected parties to them been given loans greater than 10% of the company’s net assets except in certain circumstances. One of the circumstances is where the relevant Summary Approval Procedure is followed allowing a company to provide a loan of greater than 10% of the company’s net assets to a director or connected parties to them. This is a declaration which set out the details of the transaction this must be delivered to the CRO with 21 days of the loan being made. The use of the SAP to legalise a director’s loan arrangement could expose all directors to unlimited personal liability for the debts of the company. Prior to utilising the SAP to legalise an activity, the directors should carefully consider the fact that they could be exposing themselves to unlimited liability.

If a company does provide a loan greater than 10% of the company’s net assets to a director outside of these exceptions, they are in breach of company law. If this breach is brought to the attention of the Director of Corporate Enforcement, it may result in ODCE issuing proceedings against the directors of the company. This is particularly relevant to companies without audit exemption as auditors are legally obliged to report a breach of the directors’ loan legislation to the ODCE.

If the company goes into liquidation and the liquidator determines that the director’s loan was a major contributory cause for the company’s insolvency, then the director may be held personally liable for all of the company’s debts.

Tax Implications of Directors’ loans

There are a number of tax implications in relation to directors’ loans:

 Income Tax

1. The first is Benefit in Kind chargeable to the director if they are receiving the loan interest-free or paying below the interest rates agreed by Revenue which is 4% for loans to purchase a principal private residence and 13.5% for all other loans.

Corporation Tax

1. If a director does not pay interest to the company on the directors’ loan this is treated as Interest Receivable for the company and taxed at the rate of 25%.
2. Where a director does repay the loan within the twelve-month period the company is due to pay a surcharge when submitting their corporation tax return. The is surcharge is calculated on the basis that 20% income tax was deduced from the loan before the director received it and this must be paid to Revenue. However, once the loan is repaid to the company the tax paid is refundable to the company.

How can a director repay a director’s loan?

1. “Gross up” the loan to gross pay and pay the PAYE. Expensive!
2. Sell an asset to the company and set off the amount due for the sale of the asset against the loan.
3. Place the company into a Members Voluntary Liquidation and effectively distribute the loan back to the shareholder as a distribution. What CGT the shareholder pays will depend if the shareholder can benefit from the 10% rate for Entrepreneurs, 0% rate for Early Retirement Relief or if there are capital losses available elsewhere. (We routinely do such MVL’s involving directors’ loans.)