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HMRC internal manual

National Insurance Manual

HM Revenue & Customs
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Class 1: Calculating Class 1 NICs for Directors: Directors’ loan accounts: Other liabilities

Regulation 22 SSCR 2001

If the directors make withdrawals which are not earnings or on account of earnings, thewithdrawals may place the directors in debt to the company. If there is a tax charge onthe individual under Chapter 7 of Part 3 of ITEPA 2003 (previously s160 ICTA 1988(‘beneficial loans’)) from 6 April 2000, there will also be a Class 1A NICscharge on the employer (see NIM13000 onwards). But you shouldnote that a write-off of a loan is considered to be a payment of earnings liable to Class1 within s3 and s6 SSCBA 1992.

Loans made by a “close company” to a director or an employee who is aparticipator, or an associate of a participator, may be chargeable to tax under Section419 ICTA 1988 on the company. Broadly speaking a company is a close company if it is:

  • under the control of five or fewer participators and their associates or
  • under the control of directors, no matter what number, who are participators, and their associates.

The legislation on close companies is at Section 414 ICTA 1988 onwards. Participator iswidely defined but the normal example of a participator is a shareholder. Very basicexamples of a close company are

  • X Ltd, if 5 or fewer shareholders own over 50% of the issued shares between them, and
  • Y Ltd, if the 2 directors own over 50% of the issued shares.

The Inspector of Taxes dealing with the company accounts should be approached if anyadvice is needed on whether a company is a close company. If it appears that a closecompany has made a loan to a director or participator, tell the Inspector dealing with theaccounts. The Inspector can then check whether s419 ICTA 1988 applies to it. A charge onthe company under s419 does not replace any tax charge under Chapter 7 of Part 3 ITEPA2003 (previously s160 ICTA 1988) and Class 1A NICs charges on the recipient and employerrespectively except where the loan account becomes overdrawn because of misappropriations.

The position on loan write-offs for NICs has been explained earlier but for tax there are2 potential charges on the director if he or she is also a shareholder. Section 188 ITEPA2003 (previously S160(2) ICTA 1988) treats the write-off as earnings of the director fromthe employment and S421 ICTA 1988 treats the grossed up amount as income which hassuffered tax at the basic rate. EIM21746 explains that only one tax charge should applyand that is s421 ICTA 1988 in preference to section 188 ITEPA 2003 (previously s160(2)ICTA 1988).