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HMRC internal manual

National Insurance Manual

HM Revenue & Customs
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NIM12018 - Class 1: Calculating Class 1 NICs for Directors: Directors’ loan accounts: Identifying whether withdrawals are loans or earnings

Regulation 22 SSCR 2001

It is always a question of fact based on all the evidence available whether awithdrawal is a loan, earnings or a payment on account of earnings. The clearance of anoverdrawn amount by remuneration voted is an indication that regulation 22 SSCR 2001 mightapply.

If the directors own all the share capital of the company and either formally orinformally decide that sums withdrawn by them from the company are earnings, or on accountof earnings, the withdrawals are not loans. NICs (and PAYE) should be applied at the timeof the withdrawal.

Whether or not the directors own all the share capital, it might not be straightforward tofind that there has been an informal decision to treat withdrawals as on account ofearnings. At one end of the scale there is a strong inference that there has been such anagreement when

  • the account is overdrawn, or becomes overdrawn, and
  • there is a regular pattern to the withdrawals

If the pattern has existed for more than the year under enquiry, the inference will bestronger. If there is no such pattern, the inference will be weaker.

At the other end of the scale, it will be difficult to show regulation 22 applies if thedirector receives a regular salary (not credited to the loan account) supplemented by abonus, which is only payable if certain performance indicators are achieved.

In the example at NIM12016 it could be claimed that the regularmonthly cash withdrawals are withdrawals on account of earnings. However thedirector’s opening credit balance is such that it would be very difficult to provethat the withdrawals are not repayments of loans without other facts to substantiate theclaim. But if the opening balance were, say, £150, the account would have been overdrawnfrom a very early date in the accounts year. There is then more evidence to a claim thatthe monthly cash withdrawals are advance payments of earnings within regulation 22.

The same reasoning will apply to the consideration of whether the personal expenses paidby a company credit card are earnings.