Tax on repayable lump sum income?

Herbalus

What are the tax implications on a lump sum income that is repayable if the (just now starting) company is successful but written off by the investors if the company doesn't get off the ground?

Essentially, the loan/lump sum serves as income/a salary, but is repayable on the condition that the company succeeds. Is this lump sum taxable? And if yes, could he get this tax back on completion of repaying the loan?

mania112

I believe you would class this is a business loan which you would need to pay tax on any interest paid, if it's below the official rate (currently 4% i believe).

Herbalus

What would happen if there was no interest? My friend, the one getting the lump sum, is a joint partner with 2 others (older and more experienced professionals), and the loan would come from the company (I believe, strictly speaking, from the other two partners), so there wouldn't be any interest charged.

mania112

So he would calculate the interest as if he was paying 4% and pay tax on that amount at his marginal rate.

getmore4less

How will they get paid if they have to give it back?

zygurat789

Herbalus wrote: »

What are the tax implications on a lump sum income that is repayable if the (just now starting) company is successful but written off by the investors if the company doesn't get off the ground?

Essentially, the loan/lump sum serves as income/a salary, but is repayable on the condition that the company succeeds. Is this lump sum taxable? And if yes, could he get this tax back on completion of repaying the loan?

It is necessary to consider each transaction:-
1 A loan is made to a company, the assumption is that it is limited, if it's not then it's all different.
No tax implications.

2. The limited company gives this money to an employee.
PAYE needs to be operated, if not then the employee is in receipt of a beneficial loan and it will be taxed as a benefit-in kind.

3 The loan is reopaid by the company to the original investor.
No tax implications.

Dead_keen

Herbalus wrote: »

the loan would come from the company (I believe, strictly speaking, from the other two partners)

If the loan comes from someone other than the company, the anti-avoidance legislation often called "disguised remuneration" (found in Part 7A ITEPA 2003) applies. This is bad news. I would recommend making sure that the loan comes from the company (even if the two partners have to lend money to the company to allow it to do that).

So if it comes from the partners, lending the money is a "relevant step" which means that PAYE/NIC will be due on the amount lent. There are some exemptions but they won't apply here.

If the disguised remuneration rules apply:

1. there is no refund for the PAYE/NIC paid when the loan is repaid

2. if the loan is waived then no further tax is due

3. there will be no benefit in kind on any interest-free element.

If the loan comes from the company then the tax treatment depends on whether it is really a loan or an advance of salary. If the first, then there is a taxable benefit on the loan at 4% (assuming the loan is for more than £5k - no benefit if it is not). If it is waived, there is NIC but the income tax is paid through self-assessment.

If it is an advance of salary then PAYE/NIC is due when paid. If it ends up needing to be repaid then it might be possible to get the tax back. There is a recent first tier tax tribunal that suggests you can, but the facts are different.

There can be other tax issues if the individual is also a shareholder.