A: We have previously considered the situation in a close company whereby a loan or advance to a participator is written-off and gives rise to an Income Tax liability as a distribution which is then accounted for via the participator’s Income Tax return. However, there is a further issue in the owner-managed business scenario when that participator is also a director of the close company in question.
In this situation, the write-off of the loan, advance or overdrawn Director’s Loan Account is likely to give rise to a Class 1 NIC liability. This is because HMRC view the write-off of a loan to an employee or director as a payment of earnings liable to Class 1 NIC within Section 3 and Section 6 of the Social Security Contributions and Benefits Act 1992. It is the responsibility of the employer to account for and pay the Class 1 NIC liability arising via its payroll and to submit the necessary RTI returns. Both primary (employee) and secondary (employer) contributions are likely to be due and payable.
Further information can be found at NIM02210 and NIM12020 within the HMRC National Insurance Manual.
These publications from Markel Tax were correct at the time of going to press and should be considered as principles-based guidance only. To check current validity, call the Markel Tax helpline. ICAEW (as distributor) disclaims all liability for any errors or omissions.
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