Tax Charge on a Director’s Loan

When your company has a tax charge on a director’s loan

If you are a director or shareholder in a ‘close’ company, any money owed to the company may be subject to a tax charge on a director’s loan.

What is a close company?

A close company is broadly defined as a company which is under the control of five or fewer participators, or any number of participators if those participators are directors.

Most small limited companies are close companies as they will have fewer than five shareholders or are run entirely by shareholder directors.

What is a participator?

A participator is any person having a share or interest in the capital or income of the company.  For most small companies it is a straightforward case that the shareholders are participators.

What is a s455 charge?

The Corporation Tax Act of 2010 defines the tax charge on a director’s loan. Part 10, section 455 of the act is the relevant section. The current s455 tax charge is 32.5 percent and applies to the balance owed by a director or participant at the end of the accounting period for the Corporation Tax return.

How to avoid the charge

The easiest way to avoid any tax charge on a director’s loan is to manage the business so you don’t find yourself needing to record a loan in the first place.  With Alter ledger as your accountant, you will know that you can view your business accounts in real time and never be in the dark about amounts you owe back to the company.

Many new directors are unaware that they can’t just help themselves to the company’s cash.  If you don’t have the proper documentation in place to record payments as either payroll or dividends, then any payments or benefits made to directors default to a loan.

Before a company can declare dividends, financial reports must show that it has enough post-tax profits to distribute to shareholders. If you do not keep up with your accounting, you may find that payments you thought were dividends are actually loans that must be repaid to the company. If you fail to repay the loan on time, your company will be charged a 32.5 percent penalty on the outstanding balance.

Alter ledger can set you up with Xero online accounting software and provide you with the management accounts you need to process dividends and avoid s455 charges. We can prepare all of the dividend documentation required to support your dividend payments and keep the records you need for personal tax purposes.

Repay the loan

If your s455 loan is repaid within 9 months of the accounting period, you still need to include the details of the loan in the company Corporation Tax return.  Under certain situations the tax charge on a director’s loan will be extinguished by the repayment.  There are anti-avoidance rules to prevent loans being repaid and then immediately taken out again known as bed and breakfasting.

Anti-avoidance regulations

If you repay £5,000 or more and then borrow £5,000 or more within 30 days, the repayment will be applied to the new loan rather than the older balance. This means that if you repay a loan on the last day of your accounting period and then take another loan within 30 days, you may still be subject to a 32.5 percent tax charge on a director’s loan. HMRC will treat the original loan as unpaid at the balance sheet date in this case.

Declare a dividend

The good news is that as long as the company has sufficient profits in the 9 months following the accounting period, you can declare a dividend to repay any loan.  If the dividend is credited directly to your director’s loan account, this repayment will not be caught by the anti avoidance regulations above.

Example: You owe £6,000 to the company at 31st March 2019, which is the end of your accounting period.  The company accounts are prepared in June 2019 at which point you become aware of the loan.  The company has sufficient post tax profits to declare a dividend of £6,000 on 15th July.  After receiving your dividend you need to borrow a further £10,000 on 31st July, repaying the balance on 31st January 2020.

• If you credit the £6,000 dividend directly to your loan account in Xero on 15th July the anti avoidance rules are not triggered by the £10,000 loan. There is no tax charge on a director’s loan in this scenario.
• If you pay a cash dividend of £6,000 to your personal bank account and then use the cash to repay to the £6,000 loan the anti avoidance rules apply above. The £10,000 loan dated 31st July will be matched to the £6,000 repayment on 15th July.  This means the tax charge on a director’s loan of £6,000 would be applied at 32.5%.  The company would need to pay £1,950 to HMRC.

The example above shows how a subtle difference in accounting for a loan repayment can save you £1,950.  Is it crucial to your business that your company finances are handled properly leaving you to get on with your actual business?  Give us a call or use the contact form to find out how we can save you time and stress a release you to do what you do best.