This guide to the construction industry scheme (CIS) will help new contractors understand why it was introduced, how it works and how to operate it successfully.

What is the construction industry scheme?

CIS was introduced in 1971 to reduce tax evasion in the construction industry. 

It works by requiring contractors to tax construction workers at the point of payment, rather than waiting for them to declare and pay their own tax and National Insurance after the year-end.

Does it apply to me?

If you carry out construction work and engage others to do some or all of the work for you, you'll need to register as a contractor.

If you work in the construction industry, hiring or selling your services to a contractor, you'll need to register as a subcontractor.

You'll need to register as a contractor and a subcontractor if you fall under both categories.

If your business does not trade in construction but you have spent more than £3 million on construction in the 12 months since your first payment then the CIS scheme will also apply to you.

What is construction work for CIS purposes?

The CIS scheme covers most construction projects, including:

• Site preparation such as foundations and access works
• Demolition and dismantling
• Building work including alterations, repairs, extensions and decorating
• Installing systems for heating, lighting, power, water and ventilation
• Cleaning inside of buildings after construction work
• Any work forming part of the land, e.g. walls, roadworks, power lines and waterways etc

Who is exempt from the CIS scheme?

There are a whole host of exceptions to the scheme.

For example, individuals engaging builders for domestic work in their own homes do not need to operate the CIS scheme. 

Certain trades are also excluded, for example:

• Architecture and surveying
• Scaffolding hire (with no labour)
• Carpet fitting
• Making materials used in the building industry, i.e. manufacture of bricks, plant and machinery
• Delivering building materials
• Work on a construction site that is clearly not construction, i.e. running a site canteen

What if my trade doesn’t fit into the list?

The above are general examples of work that falls inside and outside of the scheme but unfortunately there are plenty of grey areas.

You can visit HMRC's website for more information about what is included in the CIS scheme.

However, if you're not sure if the scheme applies to you, we can help. Get in touch by email to book a discovery call.

What are my responsibilities for CIS as a new contractor?

CIS can be tricky for new contractors so please take the time to understand your responsibilities.

If you determine that you are a contractor, you’ll need to register to let HMRC know BEFORE you take on your first subcontractor.

You also need to ensure that there's a contract for services in place which confirms that the subcontractor is actually self-employed rather than an employee who would have a contract of service.

Once you've established that you do have a genuine subcontractor they'll need to be verified so that you know how much tax to deduct.

You must then deduct the correct amount of tax and declare it to HMRC in a contractor return once a month to HMRC.

You have a legal obligation to give the subcontractor a 'payment and deduction statement' each month. This statement informs the subcontractor of payments made to them and the tax that's been deducted.

It's important to ensure you're keeping full, accurate and up-to-date records. Using a great bookkeeping and accounts system can help with this. We always recommend Xero - check out our previous blog on 'why construction companies love Xero' for more on this.

What rate of CIS should I deduct?

Verifying a subcontractor will tell you what rate of tax to deduct.

To do this you will need to request details of the subcontractors:

• Name, National Insurance Number and Unique Tax Reference (UTR) if they are self-employed
• Company name, company number and company UTR if they're a limited company
• Trading name, partnership UTR and nominated partner details if they're a partnership

You can verify via the CIS service on your HMRC Government Gateway, via software like Xero, or ask your accountant to do this on your behalf.

HMRC will then tell you which rate to deduct - which are as follows:

• 20% for registered subcontractors
• 30% for unregistered subcontractors
• 0% if the subcontractor has gross payment status

We recommend using Xero to easily keep track of your CIS but to understand how the deduction works, here are some easy steps to follow:

1. Start with the subcontractor's total invoice.
2. Take away any VAT (if it is been charged).
3. You can then deduct any materials, equipment hire and fuel (except for travelling) that are included on the invoice.
4. The remainder is the labour from which tax must be deducted.

Worked example

1. The original invoice is £1,200.
2. The invoice is under reverse charge so no VAT is present.
3. Material costs of £200 and hire of £250 are shown on the invoice. As a result, £450 can be deducted. The subcontractor has also shown travelling costs of £50 but these cannot be deducted.
4. The remaining £750 has tax deducted at 20%.

Therefore:

• The tax deduction is £150 (£750 x 20%) which should be declared on your contractor return and paid to HMRC.

• Your subcontractor is paid £1,050 (£1,200 - £150).

Do I actually have to pay the CIS that's deducted to HMRC?

If you suffer CIS on your income then usually no payment to HMRC will be necessary.

You'll need to make sure you keep track of the CIS you've suffered each month and submit the figure to HMRC on an EPS via your PAYE scheme.

The CIS that's been suffered can then be used to offset any PAYE and CIS that's due to HMRC throughout the year.

At the end of the year, if there's still an amount of CIS suffered which hasn't been offset, you or your accountant can apply to have it offset against other taxes or refunded.

If you don't suffer CIS on your income, you'll need to ensure you make the payment on time every month.

What are the CIS deadlines?

You must send your contractor returns to HMRC by the 19^th of every month for the previous tax month (6^th to 5^th) as well as the amount of CIS you've suffered via an EPS.

If you have CIS to pay, it will be due for payment by the 22^nd.

HMRC will charge penalties for missing a filing deadline, starting at £100 if your return is just 1 day late, £200 if a return is 2 months late and increasing to the higher of £3,000 or 5% of the CIS deductions on the return for returns more than 12 months late.

If there is nothing to declare, make sure a nil return is filed by the 19^th to avoid a late filing penalty.

If you know you won't be making any deductions for the next 6 months you can notify HMRC of 'a period of inactivity'. This will mean returns will not be required BUT you must inform HMRC and start making returns again if the inactivity ends before the 6 months finishes.

That's a lot to take in, can you summarise it?

Of course! Check out this quick video which sums up the major points.

How can Clarative Accounting help you?

We know that CIS can be tricky and time-consuming for new contractors, not to mention the problems it causes with cash flow as well as interest and fines if it goes wrong!

But we're here to take that headache away and can help with:

• Registering your business as a contractor and/ or subcontractor
• Monthly processing of returns including verifying your subcontractors, calculating deductions, filing monthly returns and sending payment and deduction statements
• Keeping track of the CIS you suffer and the PAYE and CIS you owe
• Meeting all deadlines on time, every time!

If you'd like to discuss CIS with us further book your free 15-minute discovery call today.

Navigating the various vehicle finance options for your small construction company can be a nightmare. If the different options are leaving you confused check out our blog to help guide you through.

Hire purchase

What is it?

Hire purchase (HP) is a way of financing the purchase of a vehicle.

How does it work?

You pay a deposit at the start of the agreement and acquire a loan for the remainder. Therefore you're effectively hiring the vehicle while paying off the loan in monthly instalments.

The loan is secured against the vehicle which means you don’t own the vehicle until the last payment is made. Whilst you're making payments, you're not allowed to alter, sell or dispose of the vehicle without the lender’s permission. The lender may be able to take back the vehicle if you fall behind with payments.

You sometimes have an option to lower the monthly payments by adding a final balloon payment at the end of the agreement.

What about tax?

As you're purchasing the vehicle you can claim capital allowances and get a proportion of the cost deducted from your taxable profits. Different rates of capital allowances can be claimed depending on what type of vehicle it is.

You can claim the finance element as a tax-deductible expense.

As this is a 'contract for goods', the whole amount of VAT is charged upfront and, if recoverable, you can reclaim it all in one go at the start of the agreement.

Contract hire

What is it?

Contract hire is a way of hiring a vehicle, often for a short amount of time.

How does it work?

You hire a vehicle for an agreed duration and make monthly rental payments.

The hirer retains ownership of the vehicle and is responsible for the associated risks. Once the contract has finished, you return the vehicle to the hirer.

What about tax?

The tax works exactly the same as if you were hiring any other plant and machinery for your business. As you don't own the vehicle, it isn't shown on your balance sheet. Instead, you claim the monthly payment as an expense and get the tax relief as you go along.

As this is a 'contract for services', the VAT is charged on each monthly rental and, if recoverable, you can reclaim it on a month by month basis.

There are restrictions on the VAT that can be reclaimed on some vehicles so it is important to check this on a case by case basis.

Finance lease

What is is?

A finance lease is a way of financing the lease of a vehicle.

How does it work?

You make payments, including any interest, on a monthly basis. You can usually negotiate lower monthly instalments by agreeing a final 'balloon' payment.

At the end of the agreement, you either:

• Sell the vehicle to a third party and, although you don't own the vehicle, you'll receive the majority of the sale proceeds.
• Pay the final payment and continue to operate the vehicle under the same lease, on a month by month basis, usually at a lower amount.

The finance company retains ownership of the vehicle, but you get exclusive use of it (subject to meeting the terms of the lease).

What about tax?

Despite never owning the vehicle it is added to your balance sheet as an asset, but you can't claim capital allowances as you would if you were purchasing it. Instead, you're allowed to claim the depreciation on the vehicle as a taxable expense.

VAT is charged monthly, and if recoverable, you can reclaim it on a monthly basis. There are restrictions on the VAT that can be reclaimed on some vehicles so it is important to check this on a case by case basis.

Personal contract purchase

What is it?

Personal contract purchase (PCP) is a way of financing either the purchase or the hire of a vehicle.

How does it work?

At the start of your PCP contract, a Guaranteed Future Value (GFV) of the vehicle is set which is the vehicle’s expected value when the agreement ends.

Usually, you'll pay an initial deposit followed by regular monthly instalments, up to the GFV, over an agreed time period, with a loan secured against the vehicle.

At the end of the agreement, the GFV will become payable as a single payment, if you wish to purchase the vehicle. You don’t own the vehicle until the last payment is made.

At the end of the agreement, you have four options:

• Pay the final payment to own the vehicle.
• Refinance the final payment with a new loan.
• Hand the vehicle back.
• Part exchange for a new vehicle, if the current vehicle’s value is more than the GFV.

While you are making payments, you aren’t allowed to alter, sell or dispose of the vehicle without the lender’s permission. The lender may be able to take back the vehicle if you fall behind with payments.

What about tax?

The tax and VAT implications of PCP depend on the level that the GFV is set at and the anticipated market value at the end of the contract.

If the GFV is set at or above the anticipated market value, the contract will be deemed a 'supply of services' and VAT is charged on each instalment. If recoverable, you can therefore reclaim it on a monthly basis.

The tax treatment is the same as if you were hiring the vehicle.

However, if the GFV is set below the anticipated market value, such that any rational person would choose to buy it, the contract will be deemed a 'supply of goods' with a separate supply of finance. The total VAT is therefore due at the beginning of the contract.

The tax treatment follows that as if you were purchasing the vehicle.

Unsecured loan

What is it?

A loan allows you to borrow a fixed amount over a fixed term at a fixed rate of interest. This in turn means you have the funds available to purchase the vehicle outright.

How does it work?

Purchasing in this way gives you immediate ownership of the vehicle.

You make regular monthly payments during the agreement to cover the amount borrowed plus any interest and fees. The interest rate is fixed so you’ll know exactly how much you’ll be charged from the start.

What about the tax?

The tax and VAT treatment follows that of HP.

Note: Tax and Class 1 A National Insurance will be due if a vehicle is available to an employee or director for personal use. This will apply to whichever vehicle finance option you choose.

If you'd like to discuss the accounting and tax implications of the various vehicle finance options for your small construction company, book your free 15-minute discovery call today.

Are you confused when it comes to calculating mileage claims in your construction company? If you or your employees are using personal vehicles for business travel the company can reimburse for the business miles travelled. But how does it work?

What are mileage claims?

Mileage claims are claims made by directors and employees to the company for using their own private vehicles for business reasons. Examples can include:

• Visiting customers or potential customers,
• Collecting materials,
• Attending training courses.

Travelling to a permanent place of work is a personal expense, not a business one, so mileage cannot be claimed in relation to this.

Directors and employees should always pay for all of the running costs, including fuel, of their own vehicle personally.

What can I pay?

Directors and employees should always keep mileage records. These should record the number of miles travelled in their own vehicle for company business. A mileage rate can then be paid for the total business miles driven.

You can set your own mileage rates, but there are tax implications if the rates exceed the HMRC limits. Any payments in excess of the advised rates may then become taxable.

We, therefore, recommend paying the HMRC mileage rates for diesel and petrol vehicles as follows:

• 45p per mile for the first 10,000 miles in a year, and
• 25p per mile thereafter.

HMRC also provide advisory rates for other vehicles and for additional passengers, which can be viewed here.

The company can also reclaim a small proportion of VAT on each mileage claim paid. 

There are several options for calculating the reduced level of VAT. Watch our below video and request our mileage claim template for our recommended method.

How do I process mileage claims in Xero?

There are three ways to process mileage claims in Xero:

• Using the expenses module (fees apply),
• Raising a bill from the employee,
• Entering as a journal – we cover this example in our video below.

If you'd like to find out more about mileage claims, request a copy of our mileage claim template, or need any other accounting help with your construction company, book a free 15-minute discovery call and we'll be happy to help.

Retentions are a headache for any small construction company. They're very common and often hard to avoid. This blog will ensure that you're accounting for retentions in construction correctly. So at least that's one problem off the list!

What is a retention?

Retentions are a percentage of a construction contract, often 5%, which are held back and not paid until a later date. Main contractors often insist on these as a way of mitigating themselves against snagging and defects in the work that's been completed.

How are retentions accounted for?

Corporation tax

The total amount relating to a contract needs to be included as income on completion. Watch our video tutorial to see our recommended method of recording retentions. This method records the total income but splits the retention into a separate balance sheet code to keep your debtors current and tidy.

Corporation tax will be payable on the full amount even though the retention hasn't been collected. It's therefore important that the retentions account is reviewed periodically but especially at the company year-end.

A bad debt provision could be included in your accounts when it becomes unlikely that a retention will be recovered in the future. This means corporation tax wouldn't be payable on it.

VAT

For VAT, the tax point for retentions is delayed until the earlier of the following:

• A VAT invoice being issued.
• The payment of the retention being received.

This means that you don't pay over the VAT to HMRC until the retention is invoiced/ received at a later date. If you're interested you can check out the HMRC guidance for this here.

If your income is subject to CIS then you'll operate under the reverse charge for construction, which means the VAT position will be irrelevant anyway.

CIS

CIS works on a cash basis and so will only be suffered on monies actually received.

The below table shows how your invoice should be laid out:

If you suffer retentions and use Xero for your accounting, you'll know that there's no specific way of dealing with them. We've put together this video to give guidance on how to account for them.

Note: A slightly different process needs to be followed if you suffer CIS on your income. Please contact us for more information.

If you'd like to speak to us regarding retentions or other accounting issues in your construction company, book a free 15-minute discovery call to find out how we can help.

Are you the director of a small construction company? Are you looking for bookkeeping and accounting software and not sure where to turn? Don't worry we've got you! Here's our list of reasons why construction companies love Xero!

Our top 12 reasons

1. It’s cloud based

This means it’s accessible at any time through the internet, rather than having to be installed on your computer.

There’s no need to worry about security as your data is encrypted and stored in several locations keeping it nice and safe.

What’s more, you don’t have to worry about using valuable computer space and there won’t be any backups to lose sleep over!

2. It’s convenient

You’re able to log in anytime, anywhere and with any device just as long as there’s an internet connection available.

This makes a whole host of accounting functions possible on the go, via the app, including invoicing. Increasing the chances of getting paid quicker – and what could be better than that?

3. It’s collaborative

Xero allows real-time updates, which means we can log in at the same time as you to view and make changes. This makes training and problem solving so much easier, as we can see the same information as you, at exactly the same time.

It also includes unlimited users so you can add as many of your staff as you need to, as well as us. But don’t worry, you can restrict access, so you’ll have control over who can see and do what.

4. It’s progressive

Xero take pride in constantly updating their software and in finding ways to make it smarter.

As it’s a service you subscribe to monthly, rather than downloaded annually, you know you’re always using the most up-to-date version.

5. It’s intuitive

We love that Xero is designed for business owners rather than accountants. It's proven in the language it uses – there’s no mention of dreaded debits and credits here!

It’s easy to navigate around its well laid out system. Yes, it may feel alien to start with but we’re convinced you’ll love it (nearly as much as us) in no time at all.

We often find that construction company owners don’t enjoy this side of things, so it earns massive brownie points here.

6. It’s customisable

You can easily add your logo and company details so that they show on invoices and other documents.

You can also customise and save reports so that you have the ones that mean the most to you available in real-time and at the touch of a button.

7. Its amazing integrations

You’ll be sure to find an app add-on for almost anything you can think of to meet your business needs.

Check out the new Xero app store to view the amazing possibilities. Just let us know if you need any help in deciding which is best for your company.

8. Its automatic bank feeds

Linking your company bank account to Xero enables the statements to be imported effortlessly every day.

This great feature provides you with a view of your bank balance, including cash in and out without having to access your actual bank account.

Not only does this save time, but it’s more efficient and it reduces errors.

9. It helps you go paperless

Who hasn’t dreamt of being entirely paperless? Well, now it’s a possibility!

You can prepare and send your sales invoices directly from the system. This not only reduces paper and postage but speeds up the process, so you’re likely to get paid quicker too.

You can also upload your purchase invoices and link them to the bank payment, keeping them nice and tidy and all in the right place. HMRC have said they're happy for information to be kept in this way. So now you can use your loft space for storing something other than 6 years of dusty old invoices.

10. Its dashboard

This is the screen you’ll automatically see when you log in. Again, completely customisable, you can set it to show the information that really matters to you meaning you know where you stand at any moment.

This makes reviewing the money you owe and what’s owed to you totally effortless. We all know that cash flow is king, which is especially true for construction, so these kinds of insights are really important.

11. Its additional modules and features

There are additional modules in Xero that can be switched on, such as tracking, CIS, payroll and projects. Although you’ll pay an extra subscription for some of these services, they can be highly beneficial and time-saving, if used correctly.

The CIS function, for example, is an easy-to-use module that enables quick verification of subcontractors, calculates CIS deductions and deals with all the required reporting. Reporting CIS deductions to HMRC has never been simpler!

Remember to speak to us before adding modules so that we can ensure they are suited to your specific circumstances and that you're using them correctly.

12. It’s able to auto chase overdue debts

Our busy construction company clients tell us this is one of their favourite features in Xero!

You can set the system to automatically send out chaser emails once a payment deadline has passed. You can choose how often the chasers are sent, as well as how friendly the reminder is.

The great news is there’s no need to remember all those retentions years down the line – Xero can now chase them for you too!

We know that change is scary, but once settled into using the system, our small construction companies tell us they love using Xero. In fact, they have no idea how they lived without it!

So, if you’re ready to integrate Xero into your small construction company, book a free 15-minute discovery call today to find out how we can help you.

‘Tis the season for spreading a little cheer with Christmas parties and gifts. Just be sure your construction company follows the rules to keep them allowable for tax, as well as staying on the right side of HMRC!

Here's a handy video summarising the rules but for more information check out the rest of the blog below.

Christmas parties

Here are the rules you need to follow to ensure your Christmas parties are always allowable for tax:

1. Don't splash the cash ... too much!

Keep the total cost of the party under £150, including VAT, per head and remember that this includes extra costs such as transport and accommodation too.

It's an exemption, not an allowance, so if you go over £150 per head then the whole amount is taxable - so don't make this mistake.

2. Be inclusive ... but not too inclusive!

The event must be open to all employees to qualify as tax allowable.

Other guests, such as clients or partners of employees, may attend but the event must be primarily for staff entertainment.

The share of the costs for employees and their partners to attend is deductible from taxable profits, but the cost for other non-staff such as clients and suppliers is not.

3. Don't take the ... mickey

Although you can split the exemption over several events, they must be annual events such as a Christmas party or summer BBQ.

It doesn't cover multiple trips to the pub just for fun!

How do I work out the cost per head for the Christmas party?

To work out the cost per head just add up the total cost of the event, including extras and VAT and divide by the total number of people attending.

What if the cost of the Christmas party exceeds the exemption?

Unfortunately, it's taxable ... on your employees!

You'll need to either:

• Report it on a P11D so that the company pays Class 1A National Insurance (NI) on the benefit and your employees pay tax on their share; or
• Report it on a PAYE settlement agreement so you pay the NI and tax on behalf of your employees.

What about claiming the VAT?

The VAT is recoverable for your employees but restricted for any clients and employee partners attending.

Gifts

Follow these rules to ensure your gifts are always allowable for tax:

Gifts for employees (including directors)

• They must cost less than £50 (including VAT) each.
• They can't be cash but non-cash vouchers are ok.
• They can't be in recognition of a job well done.
• Employees can't be contractually entitled to receive the gift.

Gifts can be made at any time during the year, not just at Christmas. There is a limit of £300 per year for directors of small companies (up to 5 shareholders).

Gifts for customers, suppliers or subcontractors

Unfortunately, these are only allowable for tax if they meet these strict criteria:

• They must cost less than £50 (including VAT) each.
• They must have a conspicuous advert for your company.
• They cannot be food, alcohol or tobacco.

Always remember that any cash 'bonuses' paid to subcontractors must be treated as income by them and must therefore go through the CIS scheme, where applicable.

What about claiming the VAT?

The VAT is recoverable on gifts to directors and employees.

You can recover the VAT on business gifts made to an individual or business provided the total cost of all the gifts to the same person does not exceed £50 in any 12-month period. 

We hope this blog helps you to have a festive period full of cheer, whilst remaining on the right side of HMRC!

If you'd like to find out more about how working with us can help your construction business to excel whilst staying on the right side of HMRC, book your free 15-minute discovery call today.

When you started up you were careful with money, so outsourced accounting for your construction company wasn’t even an option! But things have changed, so is now the time?

What does outsourced accounting involve?

By this we're talking about all the accounting work that you've never been keen on and are now realising isn't the best use of your time.

Bookkeeping and VAT

It need to be done, but let's be honest, it’s not really work that you value and it doesn’t generate the cold hard cash you want. 

Payroll and CIS

It's a hassle to deal with so easy to get wrong.

Management accounts

You're starting to feel like you need more information to be able to make strategic business decisions and this is where regular management accounts come in.

How do I know the time is right for outsourced accounting?

You’ve grown

As the company’s grown you’ve found you’re left responsible for a multitude of tasks that are outside of your comfort zone.  You’re not only in charge of finding the work but running the jobs and supervising them too. There’s also the marketing, not to mention the accounting side of things.

You want the company to continue growing, but already feel as if every minute is packed with things to do. If only you could only free up some time to focus on what’s really important!

You’re tired

You already work hard all day. The only time you have available to do the additional stuff is in the evenings, or at the weekends – which quite honestly sucks.  But at the moment, it’s either that or allocate time in the week and lose out on actually generating income.

You’ve lost focus

It’s well known that multitasking never produces the best outcomes. It’s less productive and you’re bound to take your eye off the ball meaning something will go wrong. Perhaps you already feel like it’s just a matter of time?

Just remember, you can’t do everything … and you shouldn’t have to.

Something has to give. It’s time to get the help you need and invest in outsourcing now!

What are the benefits of outsourced accounting?

There are so many benefits but here are the main ones.

It generates more time

Spending less time on your accounting will free you up to do what you do best. This leaves you in a better position to scale the core business and ultimately generate more income. 

Or perhaps you could use the extra time to relax and spend it with your family instead. After all, they’re what’s driving you to want to be successful in the first place.

By passing the accounting to us, you’ll free up so much time. However, even if you decide not to take up a full package we can still help. We’ll use our experience to introduce you to ways of working smarter and more efficiently. For example, we recommend all clients use Xero and link it to their company bank account. They can then raise sales invoices directly in the system, link to receipt capture technology to collect all purchases invoices and set up bank rules which all save time.

It will be more accurate

Bookkeeping isn’t given the respect it deserves and its importance is often overlooked. Many forget that it’s the foundation used to see how well the business is doing. It’s also what you’ll use to make business decisions and forms the basis of the tax you’ll pay; what could be more important than that?

As qualified accountants we’ll take care of the bookkeeping, giving you peace of mind it's being completed correctly. We'll be able to spot and correct any errors you’ve made which may be costing you money. In fact, we find clients are extremely happy when we point out things that they are entitled to claim but have been missing out on!

It’s cost effective

We realise it can be hard to justify the thought of paying for outsourcing. It's therefore a good idea to work out how much time you spend doing it yourself and to put a value on it. We guarantee it’s likely to be far more than you thought!

As trusted advisers, we’ll manage your finances on your behalf so that you don’t have the headache of wasting valuable time and can spend it doing what’s needed to grow. Most clients tell us that with our help, they free up enough time, to generate income which more than covers our fees. 

You'll have better quality management information

Accurate and up-to-date financial records play an important part in the success of a business, giving better data from which to make important business decisions.

As progressive accountants, specialising in the construction sector we’ll ensure you have expert advice and high quality information from which you can ultimately make more informed business decisions.  Our management accounts package provides all the information you'll require to see how your business is really performing. Plus, we’ll explain it to you in the format you prefer, be that written or via recorded video, with a follow up meeting to discuss it.

If you'd like to find out more about how we can help your construction company with it's outsourced accounting, book your free 15-minute discovery call today.

If you run your own Limited company this phrase has probably been thrown into conversation a fair bit - but what does it actually mean? This blog clearly explains how director's loan accounts work in small construction companies.

What are director’s loan accounts?

In short, it’s simply a record of all the transactions between the company and you, its director.

The loan account (sometimes called a director’s current account) might include any, or all, of the following:

• Money you have lent to the company.
• Money you have taken out of the company, which isn’t otherwise categorised.
• Salary due to you, but not actually taken from the bank.
• Expenses paid by you on behalf of the company which you’ve not been reimbursed for.
• Provisions for expenses, such as using your home as your office.
• Dividends declared to you but not paid from the bank account.
• Interest on the balance.

What types of director’s loan accounts are there?

Transactions between you and the company are tallied up and classified as either:

In credit

The company owes you money.

Overdrawn

You owe the company money.

Why would you loan the company money?

New businesses often need an injection of cash to get them started as they're unlikely to qualify for a bank loan. This means borrowing money from the director is a great way to access funds.

More established businesses may need a cash injection to assist with cashflow for buying new equipment.

The good news is that you can withdraw any monies that you've lent the company with no tax implications whatsoever.  Just make sure, before you repay your loan, that the company can still afford to pay out other creditors such as suppliers and HMRC.

But there’s more good news - the company can pay you interest on the money you loan it!

This is a great way of extracting money from the company in a tax efficient way.

The interest rate you charge can be set higher than the business might be able to get from a bank. This is because the bank would ordinarily be looking for security against assets or perhaps a personal guarantee. However, as you’re not providing these, the loan would be classed as unsecured (meaning it’s riskier).  We therefore suggest that a rate of 8-10% could be considered reasonable.

Always to speak to us in relation to this, as important paperwork is required.  A declaration needs to be made to HMRC, as well as the tax being deducted.  However, if planned well, it might also be possible to recover all, or some of the tax deducted. This is because most UK individuals have a tax-free allowance called a ‘Personal Savings Allowance’.

Are overdrawn director’s loan accounts bad?

With the right planning - not necessarily! 

Surprise overdrawn director loan accounts are usually bad news as there’s little planning that can be done by the time that they are discovered.  These often occur where you draw out more than you’re entitled to in salary or dividends, or if you use company money to pay for personal costs like holidays.

BUT a carefully planned director’s loan withdrawal can avoid costly and unnecessary tax implications and also be really helpful.  Say for example you need a short-term loan to pay your child’s university fees or to put a deposit down on a house – the company could loan you the money.

Important points for taking out a director’s loan:

What if’s over £10k?

If the loan exceeds this amount HMRC consider it a ‘benefit in kind’, meaning you are getting the benefit of an interest free, or low interest loan that would not be available elsewhere.  This means that either the ‘benefit’ you are receiving becomes taxable, or the more common approach is that the company should charge you interest on the loan.  HMRC’s guideline rate for 2021/22 is a fairly favourable 2.25%.

When should it be repaid?

The loan needs to be repaid within 9 months (and 1 day) of the accounts year end to avoid an additional, albeit temporary, corporation tax charge of 32.5%.  However, it’s not necessarily the end of the world if this does need to be paid as the tax can be recovered from HMRC, once the loan has been repaid.  Just remember that it may cause a cashflow issue for the business in terms of paying out the additional tax and having to wait to claim it back.

How is a director’s loan repaid?

In cash

Repaying your loan could be as simple as depositing personal money back into the business account but don’t worry if this isn’t an option, there are alternatives.

Salary

It’s not the preferred way of making a repayment as it’s not usually tax efficient, but a salary could be declared via the company’s payroll scheme, which you do not then take from the bank. 

Dividends  

The most tax efficient way of repaying the director’s loan would be to declare non-cash dividends i.e. dividends which you do not take from the company (as you’ve already taken the money). But planning will be required to assess the company’s profits, and the timing needs to be carefully considered.

We're regularly helping our construction clients get the most out of their director loan accounts. If you'd like to discuss yours, book a free 15-minute discovery call today.