When it comes to financing business operations, companies often seek different avenues to secure funds. One option that arises is loans between companies with the same director. In the UK, there are specific considerations and regulations surrounding such transactions.
In this overview, we will delve into the legality and tax implications of loans between companies with the same director, addressing various aspects and providing clarity on the matter so you know exactly where you stand. For example, it will include whether companies with the same directors can make inter-company loans under UK accounting rules and the tax and accounting associated with such a situation.
So, if you have ever wondered whether as a director of a limited company ‘can I make loans between companies?’ here’s the simple answer:
Yes, a limited company can loan money to another limited company. However, it is crucial to ensure compliance with legal and regulatory requirements. Proper documentation, including a loan agreement, should be established to outline the terms and conditions of the loan, such as repayment schedule, interest rates, and any applicable fees.
So, you can make loans between companies with the same Director, but before you start pilfering the company bank account you need to get a firm grasp of the tax and accounting rules around such a transaction. Taking a loan from a company has many variables to consider. Read on to find out how to make loans between companies with the same director.
Can you make loans between limited companies?
Loans between limited companies are allowed, however the loan is only allowed if the company making the loan has sufficient funds to cover any liabilities that may arise during the period that the money is outstanding.
So, if the loan will be outstanding for 5 years there is going to be an element of budgeting and forecasting required to make sure this does not cause any cashflow issues in the lending company. This is what you would expect a responsible director to look at before making such a decision.
Can my company lend money to another company that I am Director of?
As a director of one company, it is indeed possible for your company to lend money to another company where you hold the directorship. However, it is crucial to ensure compliance with legal requirements, as well as consider potential conflicts of interest. The Companies Act 2006 provides guidelines on such transactions, emphasising the need for transparency and proper documentation.
Companies Act 2006 guidance on loans and credit transactions can be found here.
If you are the Director and Shareholder of the company, then this can be reasonably straight forward as you may need member approval and a Board Resolution but as you are solely responsible for this then that should not be a problem.
We would also highly recommend having a loan agreement drawn up to protect both companies at the outset. You never know what the future holds and if you were to bring in new shareholders or Directors it makes sense to have these details documented.
Can one limited company lend to another?
Yes, one limited company can lend money to another limited company. However, like the previous point, it is vital to adhere to legal and regulatory frameworks. This includes following proper procedures for granting and documenting the loan, as well as considering the financial implications for both companies involved.
Are loans between companies taxable?
Loans between companies are generally subject to taxation. The interest paid by the borrowing company is treated as an expense and can be deducted for tax purposes, while the lending company may be liable for tax on the interest received. It is advisable to consult with a tax professional to understand the specific tax implications based on your company’s circumstances.
The actual transfer of cash for the loan amount is not a taxable event it is purely any interest charged and received which is a taxable event.
Accounting disclosure requirements for connected company loans
It is not uncommon for the same individual to own many companies that do not form a group, but they become related parties by the fact they are both owned and controlled by the same individual.
In these instances, it is possible that loans take place between these companies perhaps a new company is struggling to raise finance and one of the companies has a surplus of cash. It would make sense for the owner/Director to create a loan between the companies than to extract the money by way of personal income potentially creating a considerable personal tax liability in the process.
As related parties the terms of the loan will need to be disclosed in the company’s statutory accounts under the Related Party Transactions section.
Accounts prepared under FRS102 1A will need to include particulars on:
- the amount of such transactions.
- the nature of the related party relationships; and
- other information about the transactions necessary for an understanding of the financial position of the small entity.
FRS 105 does not include a dedicated section addressing the disclosure of related party information. In fact, the glossary of FRS 105 does not provide a definition for the term ‘related party.’ Consequently, micro-entities following FRS 105 guidelines are not required to disclose any transactions they might engage in with related parties in their financial statements.
FAQs about loans between companies with the same Director
Loans between companies under common control
Loans between companies under common control refer to situations where both companies have the same or related directors or shareholders. In such cases, additional rules and regulations apply. The transactions must be conducted at arm’s length, reflecting what would typically occur between unrelated parties. Failure to comply with these guidelines may lead to potential tax consequences.
Can a limited company loan money to another limited company?
Yes, a limited company can loan money to another limited company. However, it is crucial to ensure compliance with legal and regulatory requirements. Proper documentation, including a loan agreement, should be established to outline the terms and conditions of the loan, such as repayment schedule, interest rates, and any applicable fees.
Interest-free loans between connected companies
Interest-free loans between connected companies may raise concerns regarding potential tax implications. HM Revenue and Customs (HMRC) typically expects companies to charge interest on loans, even between connected entities, to reflect the commercial reality. Failing to do so may result in the imputation of a notional interest charge for tax purposes. Therefore, it is advisable to seek professional advice before structuring interest-free loans between connected companies.
Can a limited company loan money to an individual?
In general, limited companies are not prohibited from loaning money to individuals. However, it is essential to consider various factors, including the purpose of the loan, the relationship between the company and the individual, and the potential tax implications.
CTA10/S455 pertains to loans or advances provided by a close company to its participator or an associate of the participator. Essentially, if a close company extends a loan to an individual who qualifies as a participator (or an associate of a participator) in that close company, then the close company is obligated to pay tax under CTA10/S455.
Example:
A close company provides loans to its participators during its accounting period ending on 30 September 2022. On 16 December 2021, it lends £3,000, on 5 March 2022, it lends £6,000, and on 20 July 2022, it lends £12,000. To calculate the S455 charge, we examine the dates when each loan was granted and apply the applicable rate to each loan.
The total S455 liability for the accounting period will be:
- 16 December 2021 loan of £3,000 @ 32.5% = £975
- 5 March 2022 loan of £6,000 @ 32.5% = £1,950
- 20 July 2022 loan of £12,000 @ 32.5% = £3,900
- TOTAL S455 for the accounting period = £6,825
The £6,825 can be reclaimed from HMRC once the loans have been settled. The repayment is not automatic and must be reclaimed within 4 years from the end of the accounting period in which the repayment is made or the loan written off.
We have put together a guide can a company lend money to an individual to help you with this. It is also worth noting that as a Director of a limited company you are responsible for acting in the best interest of the company when making these sorts of decisions so it might be worth refreshing your memory on your responsibilities as a director of a limited company before loaning money to individuals.
If you are still struggling it is recommended to consult with a legal professional to ensure compliance with relevant laws and regulations.
Conclusion
Loans between companies with the same director in the UK are possible, but they must comply with legal and tax regulations. Understanding the intricacies of these transactions is crucial to avoid any potential issues.
By seeking professional advice, maintaining transparency, and documenting loan agreements adequately, companies can navigate this financial option while adhering to legal requirements and protecting the interests of all parties involved.\
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Jon has been in business since 1999, and in that time worked with more than 300 small business clients. As well as being an accountant, he is also an early adopter of tech, and has helped small businesses to leverage the power of their computer systems by creating software to automate and simplify accounting tasks.
