MTD update, VAT option to tax and Directors’ loans

In our latest tax tips email for accountants we said:

This week we examine the available information about MTD for VAT, and which businesses will be affected. HMRC has made some changes to the procedure for opting to tax a property for VAT purposes, which we describe below. Finally, we have good news about accounting for directors’ loans, and a reminder of the tax treatment.

Below is just an extract from that email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Directors’ loans

Loans to and from directors in close companies can cause all sorts of tax problems, but since the accounting standard FRS 102 came into effect for accounting periods starting on and after 1 January 2016, such loans can cause accounting problems as well.

The good news is that the Financial Reporting Council has proposed an amendment to FRS 102 (FRED 67) to apply to loans to a small company from a director/shareholder or a close family member of that director/shareholder. In such cases the value of the loan should be measured at transaction price rather than at net present value, which would be calculated using a market rate of interest. This amendment will have retrospective effect from 1 January 2016. In essence the amended FRS 102 treatment means those loans are accounted for as they were traditionally, at historical cost.

Remember where the director lends a significant sum to the company, those funds need to be used for a trading purpose, before the company can claim a tax deduction for the interest paid. There is a danger that if the cash sits in the company’s bank account doing little, company’s activities may be regarded as making investments rather than trading, and its shares will not qualify for entrepreneurs’ relief on disposal.


Director’s loan, Relaxed Entrepreneurs’ Relief, Online Access

The dust-up over the Budget has settled, for now, but you should expect more tax changes to be announced in the Autumn Statement. In the meantime there are two Budget-related issues to discuss with your micro-company clients: directors’ loans and entrepreneurs’ relief. We also have an update on some new security measures for accessing HMRC’s online services. 

This is an
extract from our topical tax tips newsletter dated
24 March 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Directors’ loans
When a close company makes a loan to its directors or shareholders, or associates of those people, it must pay a corporation tax charge set at 25% of the loan. This is the charge under CTA 2010, s 455 (formerly ICTA 1988, s 419), and it will increase to 32.5% on 6 April 2016. 
  
All your client companies are likely to be “close” (an old meaning of “secret”), as the legal definition is: a company controlled by its directors or by five or fewer participators. The participators are the shareholders, and certain creditors. The s 455 charge is only payable when the loan remains outstanding nine months and one day after the company’s year end. The new rate of 32.5%, will apply to loans made and benefits conferred (under CTA 2010, s 464A) on or after 6 April 2016. 
  
Where your clients have taken loans from their companies before 6 April 2016, the s 455 charge will apply at 25%. However, it will require some careful accounting to prove exactly when a new loan is taken out in respect of directors’ accounts that wander in and out of credit on a day to day basis. 
  
On 20 March 2013 anti-avoidance rules were introduced that treat a loan as continuing if £5,000 or more is repaid and borrowed again within 30 days. Where the loan is £15,000 or more the 30-day rule doesn’t apply, and the loan is treated as continuing if there are arrangements in place for the repaid loan to be replaced. We will have to check the details of the new legislation to see if those anti-avoidance provisions will be over-ruled in favour of taxing the new loan at 32.5% rather than at 25%. 
  
This increase in the tax charge is to discourage directors who pay higher rate tax from taking a loan instead of a dividend from their company. It will not apply to loans made to a charity.

This is an
extract from our topical tax tips newsletter dated
24 March 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
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and focused on precisely what accountants in general practice need to
know about each week.
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