Taxation of loans to directors and shareholders about to change.

The Government have launched yet another consultation, this time they are considering changes to the way in which loans to directors and shareholders of small companies are taxed.

Currently, if these loans are unpaid at the end of the company’s accounting year, an additional corporation tax charge equal to 25% of the loan outstanding will be payable unless the loan is repaid within nine months of the accounting year end date. If a loan is repaid after nine months the 25% tax will be refunded – although the refund process can be a drawn out affair.

One alternative now being considered is to increase the 25% rate to 40% and levy an additional permanent charge of 5%, on either the balance outstanding at each year end or on the average loan balance over the year.

The intention would seem to be to discourage these types of loans and instead increase remuneration in the form of salaries or dividends.

Any changes are likely to be included in the Finance Bill 2014.