In such circumstances not only could there be a
benefit in kind on the granting of the loan, but HMRC could deem the waiver to be a distribution to a participator or as earnings to a director or employee. However, there is provision in the legislation that prioritises the distribution treatment in this situation.
If HMRC attempt to show that the waiver should be earnings you could counter by arguing that the write off has been made in the your capacity as a shareholder, rather than as an employee.
There is no similar provision in the national insurance legislation and so this means that the income would be taxable as a distribution (dividend income) and
Class 1 national insurance (both employers and employee’s contributions) be payable.
In most small companies the director will be a shareholder entitled to vote at board level and so will also be a participator. Therefore, the distribution treatment will apply to any loans made and written off to the director or his family.
With regards to the company, the tax and NICs implications for the company of writing off a director’s loan account balance are as follows:
- The amount written off is not deductible in computing the company’s profits for corporation tax purposes.
- The amount written off is treated as earnings for Class 1 NICs purposes, giving rise to an employer’s (and employee’s) Class 1 NICs liability.
- The write-off will trigger a repayment of the associated section 455 tax.
