#Tax Myth 2 - Tax Reliefs For Funding Your Company Are Always Available

Posted on in Business Tax

With SMEs having to be more creative as to how to fund their companies, it's become more likely that you may fall on the wrong side of a tax rule.

The traditional method of a company borrowing the money direct from a bank is a no-go area for many SMEs. Even when a loan is granted, it comes with a fee, a high interest rate and you have to provide a personal guarantee against your assets, even the family home.
With tighter cash flow in the recession there is a greater need for working capital, so the funds may not even be for expansion, but merely to enable the company to continue trading.
Consequently, SMEs have been forced to look elsewhere. You may find it costs less to borrow the money personally or, at the very least, it's easier. If you have to provide security you're no worse off if your company had borrowed the money.
If you take out a personal loan and lend those funds to your company, it works very well. You charge your company an interest rate, probably the same or a bit more than the amount you're paying. Your company saves 20% corporation tax, you would get taxed on the amount it pays you, but you claim tax relief because you've lent money to your company. The net tax on you is £Nil and your company receives a 20% tax saving.

What if you take out or use an existing personal overdraft or credit card? It's tempting as it's easy and flexible. However, the rules are different and this has been confirmed in a recent tax case.

For some odd reason, you can't claim tax relief for the interest you've paid on an overdraft or credit card even where you can easily demonstrate where the money has gone and what it's been used for.
You'd therefore be left with an income tax charge which might match the 20% relief taken in the company but is clearly a worse position than it might have otherwise been. Or if you are a higher rate taxpayer, you'd pay 40% income tax, and between you and your company you'd pay an additional 20% of income tax. A disaster.
The Solution
The solution is simple. Make sure your personal funding to your company is through a personal loan. Not a personal overdraft and not a personal credit card.