This article concerns an announcement made in the Budget 2016 for which legislation will be introduced through the Finance Bill 2016.
Where loans are made to directors and unpaid nine months after the company year end, the tax charge is now 32.5% for all funds drawn.
What is the tax position for loans made by a company ?
If a close company makes a loan to a participator (for example most shareholders in unquoted companies), the company must make a payment to HMRC if the loan is not repaid within nine months of the end of the accounting period. The amount of the corporation tax, often referred to as s455 tax, is 32.5% of the loan. This tax is included within the corporate tax self assessment system and the company must report loans outstanding to participators at the year end in the tax return.
If the loan is repaid after this date, s455 tax will be repaid but not until nine months after the end of that accounting period in which it is repaid. So the company will need to pay over the tax and wait some time for it to be repaid.
A loan includes advances, such as a current account that many shareholders may have with the company when the shareholder is also a director of the company. A loan to an ‘associate’ of a shareholder, such as a relative, is also included as if the loan had been made to the shareholder.
Anti avoidance rules
A shareholder may organise his finances such that he repays a loan or advance made by the company to him just before the end of the nine month period so no tax charge arises on the company. Shortly afterwards the company provides another loan to the shareholder. In substance the shareholder has continual use of the money from the company but the company does not suffer the s455 tax that would otherwise arise.
Such arrangements are covered by anti avoidance rules as follows:
- The 30 day rule. This applies for loans of £5,000 or more. If at least £5,000 is repaid to the company and within 30 days new loans or advances of £5,000 or more are made to the shareholder (or an associate), the old loan is effectively treated as if it has not been repaid. As a consequence s455 tax may become due.
- The arrangements rule. The first rule could be avoided by waiting 31 days before the company advances further funds to the shareholder. The second rule applies where: the outstanding amount from the shareholder is £15,000 or more;
- at the time the loan is repaid by the shareholder, arrangements had been made to make a new withdrawal with the effect of replacing some or all of the amount repaid; and
- a new payment is made to the shareholder or an associate under the arrangements of £5,000 or more.
The repayment of s455 tax will be restricted by 32.5% of the lower of the amount repaid and the new payment.
This law applies to repayments of loans on or after 20 March 2013 and so has immediate effect.
What should be done by the company and shareholder so that the s455 tax does not arise?
For a long time, s455 tax has been an area where HMRC seek to identify companies which do not follow the rules correctly. The new law provides them with extra ammunition.
If loans or advances on a current account are made to a shareholder, the amounts need to be cleared within nine months of the accounting period in which these amounts arose. A long established procedure of declaring a dividend or granting of a bonus which is equal to the amount outstanding will continue to remove a s455 tax liability.
It is essential however that the amounts are cleared properly and, in the case of a dividend, in compliance with company law. This is where we can help you to ensure that s455 tax is not payable.
We can assist in ensuring you have up to date visibility of your finances by undertaking your book keeping for you on one of the cloud based products that we use – not only will this ensure you are making decisions about dividends with correct financial information, it also means we are better placed to advise you on the best strategies for fund extraction.
See the benefits from using online accounting software here.
Please contact us if you require any further information or advice.