Directors Loan/Tax Credit query

emv

Hi

Not sure if this should be in the Forum or the Tax Credit one but more people here will know about Directors Loans, I figure! I have a limited company with several £000 invested as a Directors Loan. My partner is losing his job in a month's time. Could we pay him a fixed figure each month as a Directors Loan payment (obviously only until the loan was repayed & recording this in full in our accounts)?

I know that Directors Loan income isn't taxable - should it be declared for tax credit purposes though?

Emv

Savvy_Sue

You probably need to run this past your accountant, especially if no-one answers overnight.

Pennywise

Repaying a loan has no tax effect on the recepient nor for tax credits - it's just paying back what was paid in the first place.

But make sure that you're paying yourselves at least minimum wage for the work you both do for your own limited company - whilst there's an exemption from NMW for directors usually, there is a contra rule for tax credits - if you put on your tax credit form that you're working 16 or 30 hours in your own ltd co then you have to pay yourself at least that number of hours at NMW rates, which of course triggers tax and NIC.

It seems that few people know about that rule, and even fewer HMRC front line staff know either as they never seem to mention it on the helplines etc. Trouble is the inspectors behind the scenes do know about the rule and are unlikely to ignore it if they come across a case where tax credits are claimed but NMW not paid (especially if the co has plenty of money to pay NMW) and would want their working tax credit monies back!

emv

Thanks, I think we're OK as I work 16 hours for the limited company as an employee & pay myself £100 per week. We don't pay ourselves as directors because the company doesn't make much more money than that. (And we don't do any work as directors... i.e. none is required over & above the work I get paid for.) Presumably we're not obliged to pay ourselves as directors?

Mahmood_Reza

Apart from the NMW issue as mentioned above there is no legal obligation to pay yourself as directors

Pennywise

For tax credits, you should declare the "going rate" for the work you do for your own company, either as a worker or director as per HMRC tax credit manual where it deals with deprivation of income:-

http://www.hmrc.gov.uk/manuals/tctmanual/TCTM04801.htm

"In certain circumstances, claimants may be treated as having income they may not possess.


Examples

• Claimants deliberately getting rid of income in order to claim or increase their tax credits
• Claimants failing to apply for income to which they are entitled
• Claimants providing a service for low rates of payment "

and:-

http://www.hmrc.gov.uk/manuals/tctmanual/TCTM04805.htm


"If a claimant provides a service for another person and:

• the other person makes no payment of earnings or pays less than for a comparable employment, trade or business in the area; and
• the Commissioner's for Revenue & Customs are satisfied that the other person has the means to pay for, or to pay more for the service, then
• The claimant is treated as having an amount of employment or trading incomethat is reasonable for that employment, trade or business. "

That neatly counters the idea of paying below market wage, even for directors who would normally otherwise by exempt from the minimum wage! Usefully, it also provides relief for where the company can't afford to pay a market wage. But, basically, if the company has the dosh and the directors chose not to pay themselves the going rate for the work/time they spend, then they can't claim tax credits using the artificially low rate they pay themselves and have to declare a more realistic market rate even though they don't actually receive it.

emv

OK, so I think this is OK as the company only just makes enough money to pay my salary at the moment & ifit makes a bit extra, we can legitimately take this out as a director's loan until this is repaid. And that's OK, from an HMRC point of view, they wouldn't object to the repayment of a director's loan rather than payment of a higher rate of pay for myself as a salaried employee?