Companies and their directors are seen as two separate legal entities.

Therefore, when a director wishes to borrow money from their company for personal use even for a short period of time there are a number of legal restrictions and tax implications to be considered.

Directors’ loans and the Companies Act 2014

The Companies Act 2014 prohibits directors or connected parties to them been given loans greater than 10% of the company’s net assets except in certain circumstances.

  1. The loan is to another group company
  2. The relevant Summary Approval Procedure is followed allowing a company to provide a loan of greater than 10% of the company’s net assets to a director or connected parties to them. This is a declaration which set out the details of the transaction this must be delivered to the CRO with 21 days of the loan being made. The use of the SAP to legalise a director’s loan arrangement will expose all directors to unlimited personal liability for the debts of the company. Prior to utilising the SAP to legalise an activity, the directors should carefully consider the fact that they could be exposing themselves to unlimited liability.

If a company does provide a loan greater than 10% of the company’s net assets to a director outside of these exceptions, they are in breach of company law.  If this breach is brought to the attention of the Director of Corporate Enforcements, it may result in in them issue proceedings against the directors of the company.  This is particularly relevant to companies without audit exemption as auditors are legally obliged to report a breach of the directors’ loan legislation to the Office of the Director of Corporate Enforcements.

Tax Implications of Directors’ loans

There are a number of tax implications in relation to directors’ loans:

 Income Tax

  1. The first is Benefit in Kind chargeable to the director if they are receiving the loan interest-free or paying below the interest rates agreed by Revenue which is 4% for loans to purchase a principal private residence and 13.5% for all other loans.

Corporation Tax

  1. If a director does not pay interest to the company on the directors’ loan this is treated as Interest Receivable for the company and taxed at the rate of 25%.
  2. Where a director does not repay the loan within the same financial year, the company is due to pay a surcharge when submitting their corporation tax return. The is surcharge is calculated on the basis that 20% income tax was deduced from the loan before the director received it and this must be paid to Revenue.  However, once the loan is repaid to the company the tax paid is refundable to the company.

ITAS Accounting are Registered Statutory Auditors experienced in dealing with the Financial Services industry in meeting their Revenue, CRO and Central Bank requirements.

If you or your client require any assistance, please do get in touch with us.