The Umbrella Company Solutions do not include Director’s Loans, but Private Limited Companies can offer them. This piece provides insight into the commonly asked question and the consequences associated with a Director’s Loan, courtesy of our Managing Director, Gerard Kiernan.
Due to the very positive and optimistic contracting sector, it is understandable why many Independent Professionals are opting to register their own Limited Company, particularly those who have seen their contract renewed.
Unlike Umbrella Company Solutions, Private Limited Companies are not able to offer Director’s Loans.
Gerard Kiernan, our Managing Director, provides insight into this frequently asked question and the implications that surround a Director’s Loan.
“My Company Is Flush With Cash. Can I Borrow Money?”
Unlike many answers in Tax and Accounting, the answer is both yes and no, but it is, unfortunately, no for most Professional Contractors.
We will first examine and explain what a directors loan is.
The company will generally have no problem repaying the director the money if it has the money available at any time. The most common time that a Director will lend 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.
In our second case study, we will review the situation where a Director wishes to take a loan from their company. If the company has a cash balance and wishes to provide the Director with a loan, there may be implications under both Company Law and Revenue Guidelines.
Laws governing companies
A company is generally prohibited from giving a loan under Section 239 of the Companies Act 2014, except if it represents less than 10% of its net assets. As a result, a company may be able to give a loan to a Director of a company with a net asset value of €200k if the business has no more than €20k in assets.
Company directors may be prosecuted if they fail to comply with Section 239 of the Companies Act.
Rules & Guidelines for Taxation & Revenue
- A loan made by the company to a Director is subject to both Income Tax and Corporation Tax.
- The income tax
- A loan made to a director will be subject to BIK, and is considered a preferential loan for BIK purposes.
- A home purchase loan has a reduced BIK rate of 4%, whereas any other kind of loan has a 13.5% BIK rate.
- This would result in a BIK Charge of €800, a tax charge of up to 52% of this figure, which would cost €416 for the loan of 20k @ 4%.
- To re-gross the loan to its original value before taxes, a 52% charge would be applied if the loan is treated as salary.
- This is illustrated by a loan of €4800 ‘being re-grossed’ as €10,000 gross salary, which would in turn result in a tax of €5200, not very appealing.