Company makes loans to its employees there may be tax consequences

Our newsletter this month highlights: the tax consequences of loans to directors and staff, a warning from the Insolvency Service, why repaying private fuel for company cars may be advisable and the current list of Advisory Car Fuel Rates.

Loans to directors and staff

If a company makes loans to its employees (including directors) there may be tax consequences. The same may also apply to loans extended to their family members.

For example, the employer will have an obligation to report a beneficial loan to HMRC (and pay Class 1A NIC) and the deemed benefit would be a taxable benefit in kind for the relevant employee.

A beneficial loan is one that is interest free or the rate charged is below the “official rate” and the benefit is the difference between these interest rate charges.

Fortunately, not all loans create a tax problem, certain loans are exempt from this reporting obligation. These could include loans employers provided:

• in the normal course of a domestic or family relationship as an individual (not as a company you control, even if you are the sole owner and employee),
• with a combined outstanding balance due from an employee of less than £10,000 throughout the whole tax year,
• to an employee for a fixed and never changing period, and at a fixed and constant rate that was equal to or higher than HMRC’s official interest rate when the loan was taken out ? the current rate is 2.5%,
• under identical terms and conditions as those provided to the public (this mostly applies to commercial lenders),
• that are ‘qualifying loans’, meaning all the interest charged to the loan account qualifies for tax relief.

Loans written off will also create a National Insurance Class 1 charge for the employee. They must be reported on a P11D and the employer has an obligation to deduct and pay Class 1 NIC, from the employee’s salary, on the amount written off for tax purposes.

And finally, loans by a company to its directors or shareholders may create additional corporation tax charges.

If you are contemplating loans to employees (or director/shareholders) or have current loans outstanding can we suggest that we undertake a review to ensure any tax consequences are minimised.

Don’t fall for this scam

The Insolvency Service has issued a warning that fraudsters have been contacting investors in insolvent schemes claiming to be from the Official Receiver’s office or to have been appointed by the Official Receiver to help recover funds for a fee.

These approaches are always fraudulent.

Official Receivers or any agent legitimately instructed to act on their behalf will never ask you to pay a fee to get some or all of your investment back.

The Official Receiver can only make a return to you as a creditor in failed schemes if it is possible to identify and sell any remaining assets owned by the liquidated company you bought your investment from. All too often businesses of this nature have few if any, assets left to repay creditors and it can take several years to undertake complex asset recovery work and complete a liquidation.

Paying a fee will not make you a priority creditor, meaning you get paid faster or increase the chance of you getting any money back.

If you are asked to pay a fee to get your money back someone is attempting to scam you.

The Official Receiver does not charge investors a fee to get money back and does not employ anyone else to do this on their behalf.

You should report all fraudulent contact from individuals, stating they can get your lost investments back for a fee, to the Official Receivers. You can also report these approaches to Action Fraud.

Pay-back to save tax

At first sight, company car drivers whose private fuel costs are met by their employers may seem to be onto a good thing, but there is a nasty tax hit?

Enter, the Car Fuel Benefit charge.

Let’s say the following circumstances apply:

• list price of your car when new was £30,000
• your employer pays for all your private fuel
• CO2 emissions are 147 g/km, and
• the car has a diesel engine, 2000 cc.

The 2019-20 benefit in kind charge for the use of the car (this is added to your taxable income for the year) is £9,900. This would cost a standard rate taxpayer £165 a month in Income Tax.

But then the provision of private fuel would trigger an additional Car Fuel Benefit charge of £7,953. This would cost a standard rate taxpayer an extra £133 a month.

As the title of this article suggests it is possible to reimburse your employer for private fuel provided and avoid this Car Fuel Benefit charge completely. Here’s what you would need to do:

• First of all, calculate your private mileage for the 2019-20 tax year. Estimates won’t do, you will need to create evidence, a mileage log for example.
• Multiply this private mileage by HMRC’s Advisory Fuel Rate. The present rate per mile for a 2000 cc diesel car is 11p.

Armed with this information you can now do the sums. In the above example, if the driver’s private mileage was 5,000 miles during 2019-20, the amount that needs to be repaid to the employer is £550. That’s just £46 per month.

Which means, for an effective outlay of £550, the car driver ? if a basic rate tax payer ? will save £1,593 in tax (£7,953 x 20%). That’s an overall cash saving of £1,043.

If you are receiving private fuel from your employer, or indeed providing private fuel for your employees, it is well worth crunching the numbers to see if there is a cash advantage to repaying any private fuel.

There are deadlines to consider and we can help you with the math and the reporting processes required.

Final planning note for employers

The Car Fuel Benefit Charge not only creates a tax charge for the employee, it also creates a National Insurance charge for the employer. And so, allowing employees to repay their private fuel costs will also reduce your NIC costs. A classic win-win outcome.

Current Advisory Fuel Rates

To assist with your calculations, see previous article, we have reproduced below the current, HMRC Advisory Fuel Rates. They are:

These rates apply from 1 December 2019.

Hybrid cars are treated as either petrol or diesel cars for this purpose.

Advisory Electricity Rate

The Advisory Electricity Rate for fully electric cars is 4 pence per mile. Electricity is not a fuel for car fuel benefit purposes.

Tax Diary February/March 2020

1 February 2020 – Due date for Corporation Tax payable for the year ended 30 April 2019.

19 February 2020 – PAYE and NIC deductions due for month ended 5 February 2020. (If you pay your tax electronically the due date is 22 February 2020)

19 February 2020 – Filing deadline for the CIS300 monthly return for the month ended 5 February 2020.

19 February 2020 – CIS tax deducted for the month ended 5 February 2020 is payable by today.

1 March 2020 – Due date for Corporation Tax due for the year ended 31 May 2019.

2 March 2020 ? Self assessment tax for 2019/19 paid after this date will incur a 5% surcharge.

19 March 2020 – PAYE and NIC deductions due for month ended 5 March 2020. (If you pay your tax electronically the due date is 22 March 2020)

19 March 2020 – Filing deadline for the CIS300 monthly return for the month ended 5 March 2020.

19 March 2020 – CIS tax deducted for the month ended 5 March 2020 is payable by today.