Self Employed Tax Trap

It was recently reported in the Saturday Telegraph, that Company Directors need to be very aware of a potential major problem, potentially caused directly surrounding the circumstances created by Covid 19.

The reason for the potential problem is that as Company Directors were excluded from the Chancellor of the Exchequers support scheme for self employed, Company Directors could have inadvertently created Tax Bills, ruinous Debt and potential large fines from the HMRC.

The potential problem is created where Company Directors draw monthly “Dividends” as normal during the pandemic, even if their earnings have dropped dramatically. 

The affected Company Directors could be from any “one man” band Companies of which there are thought to be 1 Million or any other Company where drawings are as Dividends.    

This is because Drawing dividends from Borrowed Money via Covid Schemes will count as Directors Loan.

The amounts taken as Directors Dividends, where there is insufficient income are then defined as “Directors Loans”, which can have a wide range of serious cost implications.

Any Loan from a Company to a Director, not paid back within 9 months, triggers a Section 455 Tax Charge of 32.5% on the outstanding debt, although Corporation Tax (the individual is liable NOT the Company), if Loans not repaid.

In addition a Directors Loan of more than £10k would result in an Income Tax bill for the Director and NI costs for the Company. 

Failure to declare the Loan and not repaying the Debt can also result in additional fines.

EXAMPLE 

A Company Director who uses a £50k bounce back Loan to cover School Fees etc,   if not repaid to the Company within 9 months, will have a tax bill of £16,250 alone!!!

URGENT - MUST DO

You must urgently review any such situation NOW, before the end of the current Tax year (5th April 2021) or your Company’s Year end?

Take advice from your Accountants URGENTLY if you think you have a similar problem.