NIM12018 | Class 1: Calculating Class 1 NICs for Directors: Directors loan accounts: Identifying whether withdrawals are loans or earnings

Regulation 22 Social Security (Contributions) Regulations 2001

It is always a question of fact based on all the evidence available whether a withdrawal is a loan, earnings or a payment on account of earnings. The clearance of an overdrawn amount by remuneration voted is an indication that regulation 22 SSCR 2001 might apply.

If the directors own all the share capital of the company and either formally or informally decide that sums withdrawn by them from the company are earnings, or on account of earnings, the withdrawals are not loans. NICs (and PAYE) should be applied at the time of the withdrawal.

Whether or not the directors own all the share capital, it might not be straight forward to find that there has been an informal decision to treat withdrawals as on account of earnings. At one end of the scale there is a strong inference that there has been such an agreement when

• the account is overdrawn, or becomes overdrawn, and

• there is a regular pattern to the withdrawals

• If the pattern has existed for more than the year under enquiry, the inference will be stronger. If there is no such pattern, the inference will be weaker

At the other end of the scale, it will be difficult to show regulation 22 applies if the director receives a regular salary (not credited to the loan account) supplemented by a bonus, which is only payable if certain performance indicators are achieved.

In the example at NIM12016 it could be claimed that the regular monthly cash withdrawals are withdrawals on account of earnings. However the director’s opening credit balance is such that it would be very difficult to prove that the withdrawals are not repayments of loans without other facts to substantiate the claim. But if the opening balance were, say, £150, the account would have been overdrawn from a very early date in the accounts year. There is then more evidence to a claim that the monthly cash withdrawals are advance payments of earnings within regulation 22.

The same reasoning will apply to the consideration of whether the personal expenses paid by a company credit card are earnings.