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.