What is it?
Throughout an accounting period a director may withdraw monies from the company against the Directors Loan account (DLA). By the end of that period, it may be that insufficient repayments have been made to cover the amount that has been withdrawn, such that the DLA shows a debit balance owed back to the company.
What to avoid.
Under the close company rules for loans to participators (which includes directors), to avoid what is referred to as a S455 charge, the loan must be repaid within nine months and one day of the accounting year end. For example, if the yearend is 31 December 2021, the overdrawn loan must be repaid by 1 October 2022. This is when the corporation tax payment is due. The charge which is set at 33.75% of the outstanding loan balance is referred to as “a s455 charge”.
HMRC have introduced restrictions since 2013, notably to cover situations where loan repayments totalling at least £5,000 are repaid but then further loans of at least £5,000 are made within 30 days. Under these ‘bed and breakfasting’ rules, the repayments are matched against the later loans, which implies that no repayment of the earlier loans has been made and the s455 tax charge on the original loan amount stands.
There is an additional provision that operates where a s455 loan is £15,000 or greater. Under the ‘motive test’, if repayments have been made such that the ’30 days rule’ is not relevant, but at the time of repayment, arrangements have been made for new loans of at least £5,000 to replace some of the amount repaid, then the repayment will also be ‘matched’ as far as possible against the new loans instead of reducing the original loans.
If you’re a director and you owe your company more than £10,000 at any time in the year, this will also trigger a benefit in kind to be reported on Forms P11D.
Actions to take
Please do get in touch to discuss the accounting and tax implications of loans to directors and how best to clear these.
First published 10 October 2022
Last updated 10 October 2022
10 October 2022
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