Tax & Accounting News

Making interest payments to directors

12/05/2010

Where a director is owed money by their own company it is usually good practice, as well as tax-efficient, for the company to pay interest on the amount owed.

The tax rules state that in such circumstances, income tax must be deducted from the payment at the basic rate, but there is an exception for what is known as ‘short interest’.

There has been much debate and legal wrangling over what counts as short interest, but it basically concerns amounts which are outstanding for less than a year. Therefore, if an agreement is in place stating that money owed to the director is repayable on demand, and in any case within a year, tax should not need to be deducted from the interest.

The key question here is intention, so if on a rare occasion some outstanding monies are not repaid within a year, it should not matter; conversely, if the loan lasts for less than a year but was intended to last for longer, it is likely to attract HMRC’s attention.

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