ATX 2021 March/June Q3 – Samphire and Kelp Ltd

Hi tutor,

Regarding the scenario below, I would like to clarify the employment income treatment of Nori (both director and shareholder of a close company Samphire Ltd) when he receives an interest free loan, and later the loan is written off.

Why is that the NIC payable is different? (Class 1A NIC is payable when the loan is made, while Class 1 NIC is payable when the loan is written off)

Thanks.
Regards,
Kelvin

Scenairo:

Nori:
– Owns 75% of the ordinary shares in Samphire Ltd.
– Has been a director of Samphire Ltd for many years.
– Owns the whole of the ordinary share capital of Kelp Ltd.

Samphire Ltd:
– Is a UK resident close trading company, which prepares accounts to 31 March annually.
– Will either gift a computer to Nori on 6 April 2022, or make a loan to Nori on the same date, to allow him to purchase a computer.

Alternative 2
– Samphire Ltd makes a loan to Nori:
– On 6 April 2022 Samphire Ltd will make an interest-free loan of £1,500 to Nori.
– Samphire Ltd will write off the loan on 6 April 2024.

Requirement
(a) Explain, with supporting calculations, the total additional taxes payable by Samphire Ltd:

(ii) If Samphire Ltd makes a loan of £1,500 to Nori, and then writes off the loan on 6 April 2024 (Alternative 2).

Answer

(ii) Alternative 2: Make a loan to Nori

Samphire Ltd is a close company. Accordingly, on making a loan to Nori, a participator, it must make a payment of notional tax of £488 (£1,500 x 32·5%) to HM Revenue and Customs (HMRC). This payment will be due by 1 January 2024. Following the write off of the loan (on 6 April 2024), HMRC will repay all the notional tax to Samphire Ltd (by 1 January 2026).

Writing off the loan is treated as a distribution, so there will be no corporation tax implications for Samphire Ltd.

Although the loan is interest-free, it will not give rise to a taxable benefit for Nori. This is because the total amount of the loan will not exceed £10,000 at any time. Accordingly, Samphire Ltd will not have any liability to Class 1A NIC.

However, a liability to Class 1 NIC will arise on writing off the loan on 6 April 2024, as Nori is also an employee of the company. Accordingly, Samphire Ltd will have a Class 1 NIC liability of £207 (£1,500 x 13·8%) and corporation tax relief in respect of this of £39 (£207 x 19%).

Therefore the total additional taxes payable in respect of this alternative for Samphire Ltd is also £168 (£207 – £39).