As a small business owner you might be able to fall back on its cash reserves from time to time. What are the tax and NI consequences of taking a short-term loan from your business?
Ups and downs
All businesses have their financial ups and downs and the same is true for business owners. In the latter case you might be able to borrow from your business to tide you over and, regardless of what HMRC may think this is, subject to conditions and consequences entirely permissible.
Incorporated or unincorporated
The first important point to make is that the position for companies, even one-person companies, is entirely different compared with that for unincorporated businesses, i.e. sole traders (self-employed) or members of a partnership (including a limited liability partnership).
Unincorporated businesses
If you draw cash from your business bank accounts or use them to settle personal bills, there are no direct tax or NI consequences. Your tax and NI bill is worked out on the amount of profits your business makes and not how much cash you draw. So even if you borrowed money from your bank to fund you over this tricky period it won’t count as taxable income.
Companies
The tax position is very different if you’re a director shareholder of a company. Every cash payment or personal bill paid by your company can count as taxable income, i.e. as salary, dividends, or benefits in kind, each with the usual tax and NI bills and compliance requirements that go with them. Alternatively, you can treat the cash you take as a loan; this isn’t necessarily free of tax consequences but is generally a cheaper and more flexible arrangement.
Tip. The good news is that where your company is indebted to you, say because you lent it money to get it up and running, you’re entitled to treat any cash taken or bills paid on your behalf as non-taxable.
Trap. To prevent unnecessary tax liabilities resulting from drawing or using your company’s cash for personal benefit, keep accurate records indicating how you have categorised the money taken from your company. If you don’t, HMRC might argue that cash you take is salary on which PAYE tax and NI is payable which you should have reported through your payroll software. Failure to do this can result in penalties.
Timing and proper record keeping
If you want to treat the cash you take from your company as a loan, keep a board minute or written record to make sure the bookkeeper knows to record the transaction as a debit to your director’s loan account. If later you want to clear all or part of the debt you’ve built up with your company, you can approve a dividend or bonus. But rather than drawing the cash from your company you can ask your bookkeeper to use the dividend or bonus as a credit to your loan account.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.