Small Limited Liability Companies and borrowed finance during the Covid-19 lockdown

Small Companies that fall into the category of Close companies, normally with less than 5 Directors or major shareholders, have been encouraged to take advantage of Bounce Back Loans, providing very preferential interest rates and loan periods. They will generally provide up to 25% of a limited companies annual turnover.

But if the borrowings are used by the directors to fund their personal expenditure there is a strong likelihood that the Directors’ loan accounts will become overdrawn, and this will result in the companies to be liable to the section 455 surcharge.

Unless the limited company can generate profits to pay salaries or dividends to their directors, then their loan accounts will become overdrawn. The section 455 rules are strict, and if the loans are not repaid in full after 9 months from the company’s financial year end, then there is a charge of 32.5%. Although this is subsequently repayable to the company by HMRC if the loans are repaid, this could become a significant cashflow issue for many small companies.

Please read our blog on overdrawn loan accounts and feel free to contact us if you need help on this.

This does not relate to any grants that have been received as these are treated as taxable income, and any surpluses can be distributed as Dividends.

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