Help, my Corporation Tax bill has increased due to a S455 tax charge. What is this and what can I do?
Many years ago, if you had your own company, it was possible to build up wealth in that company and then lend it to yourself indefinitely, thereby putting off the date it would become subject to income tax.
HMRC were long aware of this ploy and in 2016 extended the rules with all Director Loan Account (DLA) transactions in close companies being brought in to scope of the anti-avoidance legislation under Section 455 of the Corporation Tax Act 2010 (S455).
What are the rules?
If your company lends you money (posted to your DLA) and this is not repaid within 9 months of the company’s financial year end, then you will have to pay a S455 Corporation Tax charge.
The S455 charge is currently 33.75% of the loan value, ouch!
How can I avoid this S455 tax charge?
To totally avoid any charges you should clear your DLA within 9 months of the financial year end. There are a few options to do so:
1) Assuming the company has sufficient profits, you can declare a dividend to clear the Director’s Loan Account.
2) If you don’t have available profits for a dividend, then you can repay the money into the business bank account from your personal account.
3) If you don’t have the funds personally then you may need to consider borrowing from friends / family, taking out a loan, or selling personal assets to raise funds.
Note. If you repay the director’s loan then you cannot withdraw the funds again until after 30 days has passed, otherwise the charge still applies.
What happens if none of those options work?
In the event that the loan is not repaid within 9 months of the financial year end you will have to pay the Corporation Tax charge, which will also be due to HMRC 9 months after the financial year end.
The good news is that once the Director’s Loan Account has been repaid, perhaps by declaring dividends from future profits, then the S455 tax charge can be reclaimed from HMRC. This can take over a year however so best to try and avoid the situation in the first place!
Why have I not seen this before?
This legislation has been around for a while and we frequently mention this in our annual salary guides, in newsletters and on the website, however within a4c we have noticed a dramatic increase in the number of directors borrowing more money than is available from their companies, possibly driven by the current cost of living crisis.
How can I protect myself?
It is important to remember that, if you are the director and shareholder of a limited company, the company money is not your money.
Whilst you might look at the company bank balance and believe that funds are available for you to withdraw, it is important to remember that your taxes must be paid first, including Corporation Tax, PAYE, CIS and VAT. After this your suppliers will need paying along with any finance agreements / bounce back loan payments etc.
Can a4c help me?
Assuming that your accounting records are kept up to date in Xero, then we can review the available funds with you to determine if you are at risk of incurring a future S455 charge.
We can enable the account watchlist feature in Xero too, so that you can see the running balance of your Director’s Loan Account on the Xero Dashboard.
Understanding your numbers can feel daunting however we are always available to help explain how your accounts work, so that you can feel in control.