Tax on overdrawn Director’s Loan Accounts
HM Revenue & Customs (HMRC) has introduced legislation (the Section 455 Corporation Tax Act 2010) to impose a tax liability on a company if, at the end of an accounting period, there is a loan outstanding to an individual who is a participator (shareholder).The corporation tax is payable to HMRC on the normal corporation tax due date, that is nine months after the end of the accounting period. The S455 tax due is a stand-alone liability and is payable whether or not the company has made a profit. The S455 tax can however be mitigated in one of two ways:-
- If the loan is repaid in full before the normal corporation tax due date, i.e. nine months after the end of the accounting period, then the tax involved does not have to be paid although the liability should be declared on the company’s corporation tax CT600 return and the equivalent relief also claimed to reduce the amount due to nil. If the loan is repaid in part within the relevant nine month period then pro rata relief is granted.
- If tax is paid and the loan is repaid in whole or in part after the nine month point post the accounting period end, then such tax as relates to the loan repaid is refunded to the company. However, it is important to note that in these circumstances the tax is not repayable until nine months after the accounting period in which the loan is repaid. Once Section 455 tax has been paid it can therefore take a considerable amount of time for it to be recovered even after the underlying loans have been repaid to the company.
Anti-Avoidance rules are designed to prevent repayment relief being available in circumstances where funds are either re-drawn within the following 30 days or there are intentions/arrangements (whether within 30 days or otherwise) for repayments to be re-drawn. These rules mean that repayments will need to be genuine and permanent and the previous strategy of using a temporary repayment to prevent a Section 455 CTA 2010 liability arising will no longer be permitted.
Overdrawn director’s loans can also give rise to tax charges under Section 175 ITEPA 2003 relative to the benefit-in-kind of having a cheap or interest free loan. Small loans are ignored for this purpose but all other loans must be disclosed and a benefit-in-kind calculated thereon and declared on form P11D. Failure to declare this benefit on form P11D is a common error and if identified via a PAYE audit or review of the company’s corporation tax return could well be the starting point for a wider investigation into the affairs of the company and its directors/shareholders. As well as producing a possible personal income tax liability for the director the P11D entry produces a liability to Class 1A National Insurance for the company. These benefit-in-kind charges can be mitigated if the company charges the director ‘commercial’ interest on the overdrawn balance.
Credits to directors’ loan accounts often arise from dividends. It should be noted that dividends can only be paid if all the relevant Companies Act 2006 procedures are properly followed, in particular appropriate resolutions, vouchers, etc. and dividends can only be paid from available post-tax profits properly identified from relevant accounts.
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