Directors’ loan accounts (DLAs) are a common financial tool for owner-managed businesses.
However, mismanaging them can lead to significant tax implications under Section 455 of the Corporation Tax Act 2010.
To use directors’ loans effectively and avoid unnecessary tax liabilities, you need to understand the associated rules rather than operating blindly.
What does Section 455 cover?
Section 455 applies to close companies when a participator, or their associate, owes money to the company that remains unpaid nine months and one day after the end of the company’s accounting period.
While this legislation often relates to directors’ loans, it also applies to loans made to partnerships, trusts, or other entities connected to participators.
The tax rate under Section 455 is currently set at 33.75 per cent, applied to the outstanding loan balance.
This tax is paid by the company, not the individual borrower.
To steer clear of a Section 455 tax charge, the loan must be repaid before the nine-month deadline following the accounting period.
Remember, HM Revenue & Customs (HMRC) has implemented anti-avoidance rules to prevent practices such as “bed and breakfasting,” where loans are temporarily repaid to avoid tax and then reissued.
These rules include:
- The 30-day rule: Loan repayments of £5,000 or more within 30 days of taking out a new loan are disregarded.
- The arrangements rule: If a new loan of £5,000 or more is arranged while the balance exceeds £15,000, repayments are ignored.
However, not all loans fall under Section 455.
Exceptions include:
- Loans made in the ordinary course of business for trade purposes.
- Loans under £15,000 to employees without a material interest in the company.
- Credit provided for goods or services, provided repayment terms do not exceed six months.
If you are unsure whether Section 455 applies to your situation, you should consult a tax adviser.
Directors’ loans and personal tax considerations
Directors’ loans exceeding £10,000 carry additional tax implications.
Unless interest is paid to the company at HMRC’s official rate, the loan triggers a beneficial loan interest charge.
This must be reported on Form P11D, and the company is responsible for Class 1A National Insurance contributions on the taxable amount.
Recovering Section 455 tax
If a loan is repaid after the nine-month deadline, the company can reclaim the Section 455 tax.
Relief becomes available nine months and one day after the end of the accounting period in which the repayment occurs.
Claims are submitted using Form L2P, with accurate records required to document repayments in the company’s accounts.
Key compliance deadlines to remember
Proper management of DLAs involves adhering to critical compliance deadlines:
- P11D submission: Due by 6 July following the end of the tax year.
- Class 1A NIC payment: Due by 19 July (or 22 July if paying electronically).
Establishing robust processes for tracking payments and loan periods will help you avoid missing these important deadlines.
Need advice on directors’ loans or Section 455?
Addressing issues and answering queries early can save your business from unnecessary tax charges and compliance headaches.
If you need assistance with the complexities of Section 455 or managing directors’ loans, we strongly recommend you speak with a tax adviser.
Get in touch with our team for more information.
