Showing posts with label partnership. Show all posts
Showing posts with label partnership. Show all posts

Friday, November 1, 2013

Director's Loan Accounts: beware if overdrawn

A director's loan is a loan made by a company to a director (or related party). HMRC has been trying to prevent directors to borrow money from their business because this is money they would have to draw either as salary or dividends otherwise and pay tax and NI on those amounts.

In 2010 HMRC published the Corporation Tax Act 2010 and section 455 put in place some rules to prevent the practice: if a close company makes a loan to a relevant person who is a participator in the company or an associate of such a participator and if this loan is outstanding at year end, then 25% of that loan will have to be paid under Corporation Tax to HMRC -- unless the loan is reimbursed before tax is due (usually 9 months after the year end). Moreover, if at any point in time, the loan balance is above £5,000 the whole loan becomes a benefit in kind for the director.

Friday, October 14, 2011

Class 4 NI refunds for sleeping partners

A “sleeping partner” is a partner who does not take any part in the running of the partnership’s business. HMRC now accepts that such a partner is not liable to Class 4 NIC, because they do not fall within the definition above. Class 4 National Insurance contributions are paid as a percentage of your annual taxable profits - 9 per cent on profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount.

In the past, there has been a reluctance to classify a partner as a “sleeping partner”, particularly in the case of the standard husband and wife partnership. This was because there was a fear that HMRC would argue that the sleeping partner was not really entitled to their profit share, and that as a result the active partner had made a “settlement” on the sleeping partner by consenting to their having a share of profits they had not “earned”. The fear was that HMRC would therefore seek to tax the active partner on the profits diverted to the sleeping partner – often with the result that those profits would be liable to income tax at 40% instead of the 20% they suffered in the hands of the sleeping partner.