As the tax rate on dividends increased from 32.5% to 33.75% on 6 April 2022, the amount of the s455 tax charge on an overdrawn DLA will also increase to the same rate as it is linked to the higher dividend rate. The interest-free loan may not be as agreeable as it once was!
“What’s the minimum balance on which the s455 tax is applied? Is it £10,000, £5,000 or is there no de-minimis?” “If the company charges interest on the loan will that eliminate all compliance obligations for a company?” “Can I repay the overdrawn balance but then can I drawdown on it straight away?” These are just a few areas and questions that can cause confusion on the treatment of an overdrawn DLA.
Below, we take a brief look at what director’s loan accounts are and explore the various reporting tax obligations that can sometimes be an after-thought.
What is a director’s loan account?
A director’s loan account is essentially money that belongs to the company that a director, who is also a shareholder, can borrow. The withdrawal excludes salaries or dividends but may include expense payments made personally that are to be paid back to the director. Each director has their own loan account, and each director could be in a different position.
The loan between the company and the shareholder/director can be in credit (what the company owes to the director) or in debit (what the director owes to the company). There might be an arrangement to pay interest on the loan, in either direction, depending on whether the DLA is in credit or overdrawn. The complexities arise when the loan is in an overdrawn position which can result in additional liabilities.
What is a s455 charge?
An anti-avoidance provision was introduced to prevent value from being extracted from close companies (broadly a company controlled by five or fewer participators or by any number of directors) by way of a loan/advance by an individual who is a participator, or an associate of a participator (any person having a share or interest in the company). Generally, a participator is any person who has a shareholding in the company.
If a DLA is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period, an additional tax charge known as a ‘s455 tax charge’, is applied, on any amount of loan outstanding. The overdrawn balance and s455 liability are included within the corporation tax return of a company. For the 2022/23 tax year the s455 rate is 33.75%.
Mr. A is the director of A Ltd. Accounts are prepared on 30 June each year.
On 30 June 2022, Mr. A’s director’s loan account is overdrawn by £50,000. The account remains overdrawn on 1 April 2023.
An Ltd must pay s455 tax of £16,875 (£50,000 @33.75%) by 1 April 2023 (the date on which corporation tax for the period is due) together with any corporation tax liability that may be due.
In the following year there were further advances made to Mr A and the final overdrawn balance on 30 June 2023 is now £75,000, still overdrawn on 1 April 2024. Again, an s455 tax charge of £8,437.50 is applied, this time on the increase of £25,000 and due by 1 April 2024.
The s455 tax paid can be reclaimed by A Ltd at some point in the future if the director repays the loan back or the company decides to write off the loan to the director. If the loan is written off by A Ltd, then tax must be paid on the loan by the director as though the release were a dividend. The director will need to include the written-off loan on their annual Self-Assessment tax return and pay tax personally at the dividend higher rate threshold of 33.75%.
Unfortunately, the repayment cannot be claimed until nine months and one day after the end of the accounting period in which the loan is repaid or released.
Mr. A repaid the full loan on 31 August 2024. Therefore, the earliest the company can receive the repayment of the s455 tax paid is 1 April 2026. This is because the loan was repaid to the company in the accounting period to 30 June 2025.
Relief for any repayments or releases is claimed on the company’s corporation tax return in the accounting period in which the loan is repaid or released. Where the claim cannot be included on a return (e.g. if it is too late to be included on the CT600A by amendment or otherwise) a separate claim should be made by submitting a letter to HMRC.
‘Bed and Breakfasting’
An anti-avoidance rule was introduced to target certain arrangements in respect of loans of £5,000 or more. Where such a loan is repaid before the s455 tax charge kicks in, but then – within 30 days – a further amount of £5,000 or more is borrowed again, the repayment is disregarded.
However, these ‘bed and breakfasting rules’ also apply outside the 30-day window to loans of £15,000 or more where repayments are made and then arrangements are in place for a loan of at least £5,000 to be made to the same director.
Additional rules to be aware of are when indirect loans are made to participators where:
Company A is a close company. Instead of making a loan directly to Mr. A, an individual participator, it makes it to an associated company, Company B. Company B then passes the loan to A. The loan by one company to the other is treated as if it had been made direct to X.
The indirect loans to participators rules are particularly highlighted in management buy-out situations as the close company can make a loan to the new owners who then use those funds to pay the outgoing (existing) shareholders for their shares. Although facts would need to be considered in each case, the arrangement would likely fall within the s455 rules.
Other tax and reporting obligations
Overdrawn director’s loan account
In addition to the s455 tax charge, the company also has a requirement to report the overdrawn loans of more than £10,000 as a ‘benefit-in-kind’ for the director on the form P11D at the end of the tax year. The benefit-in-kind is included on the director’s self-assessment tax return.
If the loan is ‘interest-free’ or at a rate below HMRC’s official interest rate, the benefit attracts additional liabilities for the company as Class 1A National Insurance is charged on the loan at a rate of 15.05 % (2021/22 13.8%).
The benefit in kind rules apply both to directors who are shareholders and those who are not. They also apply to loans to employees irrespective of whether or not they are shareholders. Even if interest is charged on the overdrawn loan, the loan is a reportable benefit, disclosing any amounts paid as interest!
Director’s loan account in credit
Sometimes when the director’s loan account is in credit i.e. a company has borrowed a considerable amount of money from the director, a company can pay interest for lending the funds to the company, whether this is a regular payment or not.
When an interest payment is made, the company will have to pay 80% to the director and 20% basic rate tax to HMRC. The company will then be required to notify HMRC via a form CT61 that the payment has been made and pay over the tax deducted to HMRC. Regular payments are reported and paid quarterly to HMRC.
This filing obligation is often overlooked!
One final point…
The whistle-stop tour above for director’s loan accounts has been simplified for this article. As ever with tax, there is much detail around the legislation and that needs to be considered fully for each scenario.
If you need help with understanding the position of your director’s loan account or indeed fulfilling the filing obligations, please contact a member of the Claritas Team.
To find out more about what we do, please get in touch.