CIC Association

Serving Community Enterprise

Hi CIC people

Can anyone help with advice on the protocol /necessary paperwork for a director making a loan to the CIC and also for the reverse process when the director request return of the loan. 

Regards

Robbie 

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Hi Robbie,

Loving your website!

I note from your accounts for the year ended 30 April 2016 that the company received a director’s loan which was interest free and unsecured but for the fullness of my reply I will cover loans that may or may not attract interest.

Lending money to a company is relatively uncontroversial and there is nothing to prevent you making a private loan to a CIC. You will appreciate that it is far more straightforward to lend money to a company than it is to borrow money from it. The upside is that it will inject much needed cash into the CIC; the downside is that it is not particularly tax efficient and you have to keep a lot of people happy.

The Regulator of Community Interest Companies

If you intend to charge interest on the loan, the Regulator would expect it to be at or below the commercial rate and I would suggest you research what the high street banks are currently charging small businesses. The legislation (Community Interest Company Regulations 2005) is relatively silent on loans entered into by CICs, with the exception of performance related interest loans. These are loans where the interest payable is linked to the performance of the CIC. The ability to pay uncapped interest on such debt would circumvent the asset lock and in order to prevent this, the payment of such interest is subject to a cap. The Regulator uplifted the cap on 1 October 2014 to 20% of the loan outstanding. This is a complex area but the Regulator has helpfully drafted Worked Examples, page 7 refers:

https://www.gov.uk/government/uploads/system/uploads/attachment_dat...

With regard to paperwork, the Regulator would expect these loans to be subject to a loan agreement which sets out the dates and size of the loan, the agreed rate of interest (if applicable) and the repayment schedule. As best practice, the transaction should be noted in a board minute, recording that the company is authorised to take the loan and the reasons for it and kept in the same place as other statutory records such as the minute book, register of members etc.

Whilst a director can make a loan to the company in the form of cash, the loan can also take other forms. For example, if a director pays for equipment, products or services, on the CICs behalf or if they forgo salary payments for an agreed period of time, this also represents a loan to the company and must be recorded in the Director’s Loan Account (DLA). These loans are recorded as credits in the DLA and will be reported as current liabilities on the balance sheet when the company files its annual accounts.

The DLA is not a real account, the company will have a business bank account and you will have a personal bank account but these are both different from a DLA. The DLA is a virtual account that exists only in your accounting records as a way to keep tally of the flow of money between you as an individual and the CIC.

HMRC

HMRC provides guidance on director’s loans which is as follows:

https://www.gov.uk/directors-loans/you-lend-your-company-money

  1. Charging Interest - the loan is not subject to corporation tax and any interest charged to the company will count as a business expense for the company and personal income for you, which must be reported on your personal self-assessment tax form.

       When the interest payment is made, the company would have to pay 80% to you and 20% basic          rate tax to HMRC.  The company is then required to inform HMRC every quarter, using form              CT61, that the payment has been made and pay over the tax deducted.  To ease the red tape,            payments of interest could be made at the end of the tax year in which case only one return              would be necessary.  The loan agreement, would of course, need to reflect this.

    2. Not charging interest - if you do not charge interest there are no tax implications to worry               about and both you and the CIC will avoid this extra administration.

It should also be noted that the money does not count as income or expenditure. You loan the company money and the company repays that loan so the transactions only appear on the balance sheet.

Insolvency

The director’s of the CIC have a duty of care to ensure that there are sufficient funds to repay the loan and in particular that there are no insolvency issues. If there are issues and they chose to repay the loan in advance of other creditors this may constitute a preference. If the company goes into Liquidation the Liquidator may look to you to repay the amounts you have been paid in priority to others.

Hope this helps.

Phil

PH Consultancy

Hi Consuela

Thanks for getting back to me.

I'll follow up your link.

I appreciate your offer too.

Best wishes

Robbie

Dear Phil Glad you like our website - you would love it here on the farm. Thanks for your very comprehensive and full response. I appreciate your help - good to know that there are people like yourself out there.

Best wishes

Robbie

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