HM Revenue & Customs (HMRC) has launched a new compliance initiative targeting company directors who failed to declare income from written-off or released loans between 6 April 2019 and 5 April 2023. This follows the announcement in Agents Update: Issue 132 and leverages HMRC’s powerful Connect data analytics system to identify discrepancies in Self-Assessment tax returns.
Who Is Affected?
The campaign focuses on directors who:
- Received a loan from their company that was later written off or released
- Did not report this as income in their Self-Assessment return
Under UK tax law, these loans are taxable income. Non-disclosure can result in underpaid tax, penalties, and interest.
Tax Implications of Directors’ Beneficial Loans
1: Benefit in Kind for Large beneficial Loans
Where beneficial loans over £10,000 are concerned they must be:
- Reported on Form P11D
- Declared on the director’s Self-Assessment return
- Subject to Class 1A National Insurance Contributions (NICs) by the company.
2: Repayment Within 9 Months
If repaid within 9 months of the company’s Corporation Tax period end details will be reported via CT600A.
3: Loans Not Repaid in Time
Where loans remain outstanding nine months after the end of the accounting period, the company pays 33.75% Corporation Tax (or 32.5% for loans before 6 April 2022) under CTA 2010, s455
Tax is reclaimable once the loan is repaid, but interest is not.
4: Loans Written Off or Released
Where loans are written-off or released, then the following needs to be considered:
- Treated as a dividend (if from a close company) and reported in the director’s Self-Assessment
- If not a close company, treated as a benefit in kind and reported on Form P11D
- Company must pay Class 1 NICs via payroll in both cases.
Potential mitigation of NICs on Written-Off Loans
To potentially avoid a Class 1 NIC charge:
- Shareholders (not directors) must approve the write-off via a general meeting or written resolution under Companies Act 2006, Sections 292–293
- The write-off must be shown to be non-employment related, e.g. in a family-owned business where the loan is forgiven for personal reasons
However, HMRC may still treat it as a reward for services unless clearly proven otherwise.
Beneficial Loans & Interest Charges
Where interest is charged below HMRC’s official rate (currently 3.75%):
- The discount is a taxable benefit in kind
- The director must report this on their Self-Assessment
- The company must:
– Include it on Form P11D
– Pay Class 1A NICs
– Record actual interest received as income
Note: Simply capitalising unpaid interest (i.e. adding it to the loan balance) does not count as payment and still triggers a beneficial loan tax charge.
How HMRC Detects Non-Compliance
HMRC’s Connect software analyses a wide range of data sources to identify undeclared income, including:
- Companies House records
- Banking and property data
- Self-Assessment submissions
- International financial reporting (under agreements with over 60 countries)
This allows HMRC to detect discrepancies and trigger wider investigations.
What Should Directors and Companies Do?
- Voluntary Disclosure
Use HMRC’s Digital Disclosure Service (DDS) to report unreported written-off loans. This often leads to reduced penalties and interest.
- Disclose Earlier Loans
Even loans written off before April 2019 can still be disclosed through DDS.
- Amend Recent Returns
Loans written off after 6 April 2023 fall within the standard amendment window and should be corrected through HMRC’s online process.
Why Prompt Action Matters
With HMRC ramping up enforcement and data-matching capabilities:
- Early disclosure limits penalties and interest
- It demonstrates cooperation, which is looked upon favourably
- It may prevent a broader enquiry into a director’s tax affairs
Act Now
Although HMRC’s initiative highlights directors’ loans, the employment tax treatment will be equally applicable to employee beneficial loans. Companies should review historic loan arrangements, confirm all income has been properly declared, and make necessary corrections without delay.
If you’ve received a nudge letter or need advice on any employment taxes matters, please contact the HaysMac Employment Taxes Team for expert assistance.
