Bleedin\’ \’Ell: a decent Guardian piece on tax dodging

It is not clear from the company\’s accounts how much Hoy could have saved in tax, although a salary of £325,000 would have been liable for tax of about £147,000. But the calculations are likely to have been more complex than that.

Richard Godmon, of accountants Menzies – which specialises in owner-managed businesses – said: \”Directors\’ loans can be a tax-efficient way of accessing funds over the short term.\”

However, he added that if you borrow from your company you are taxed as if it were an employee benefit.

HMRC assumes you would have paid 4% interest on the loan if you had borrowed it on the open market, so a 50% taxpayer has to pay a 2% tax charge every year.

The company making the loan must also pay 25% of the loan amount to HMRC, which is reimbursed when the loan is repaid by the individual. Directors could still technically avoid repaying loans – and therefore tax – by dissolving their company, as once it is struck off from Companies House all balances due to the company cease to exist.

However, HMRC can strike off applications if it feels there is still tax to be paid.

Last year HMRC introduced new \”disguised remuneration\” rules. It said: \”The objective of this legislation is to prevent the avoidance or deferral of income tax and NICs [national insurance contributions] on employment income.

\”It will impact on employers and intermediaries who use trusts or loans to reward employees with a view to avoiding or deferring paying tax and NICs.\”

It rather sounds like this is a \”problem\” that has already been dealt with then.

Without, you know, entirely changing the basis of tax law as certain retired accountants would wish.

4 thoughts on “Bleedin\’ \’Ell: a decent Guardian piece on tax dodging”

  1. I’m not sure the problem is wholly solved.

    1. Is it really realistic to say that 4% is a commercial rate for a £300k unsecured loan, with no repayment terms? Do any of your readers have £300k unsecured overdrafts at 4%? (And overdrafts are in theory callable).

    2. It gives him the ability to choose when to pay income tax (ie if tax rates come down, the co can write off the loan, at which point income tax would presumably be payable on the amount written off). I know small companies/businesses can to an extent move profits between years but they can’t do so indefinitely. (Eg they can’t keep buying masses of stock at year end to depress earnings that year- sooner or later they end up with unsold stock and no cash.)

    So yes it’s legal (and I have no views on its morality), but if he’s being taxed on the basis of a wholly unrealistic “commercial” rate, it’s not yet a problem solved.

  2. It’s like IR35 – in theory the problem is already solved, but in practice HMRC pursue so few cases that it’s worth taking the risk. The only watertight solution (regardless of the risks) is to insist that income tax be paid on loans, and reimbursed when the loan is paid off. The number of directors’ loans would quickly collapse.

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