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Direct loans and s455 Corporation tax

Direct loans and s455: an overview

Section 455 (s455) corporation tax is a charge that close companies have to pay on outstanding loans to directors or 'participators', such as shareholders in the firm. s455 becomes payable nine months and 1 day after the end of the accounting period in which the loan was made. The charge is 25 per cent of the outstanding loan.

If the loan is repaid before this date, relief from the tax applies. If the loan is repaid after this date, the tax charge must be paid but it will be repaid nine months after the end of the accounting period in which the loan was repaid.

Avoidance of s455

Before 20 March 2013, it was possible and commonplace to avoid paying s455 tax by one of two methods:

1.       Making the loan via a limited liability partnership (LLP), partnership or trust where at least one 'participator' in the close company is a member, partner or trustee.

2.       Repaying the loan in full just before the nine month repayment deadline, and then immediately issuing a new loan for the same amount shortly after.

New rules in force since 20 March 2013

Two new s455 rules came into force on 20 March 2013, as part of HMRC's efforts to prevent the avoidance of the charge.

The new rules are:

1.       For loans of at least £5,000 or more
If at least £5,000 is repaid to the company and new loans or advances of £5,000 or more are made to the shareholder (or an associate) within 30 days, the old loan is treated as if it has not been repaid and s455 tax may become due.

2.       For loans where the outstanding amount is £15,000 or more
Repayment of s455 tax will be restricted by 25 per cent of the lower of the amount repaid and the new payment if:

·         at the time the loan is repaid by the shareholder, that person intended to redraw any of that amount from the company or had made arrangements to make a new withdrawal; and

·         at any time after the repayment is made a new payment is made to the shareholder or an associate.

Help with s455 corporation tax

s455 tax liability can still be removed by declaring a dividend or granting of a bonus which is equal to the outstanding amount.

Contact Tracy Attard at tracya@knightandcompany.co.uk or call 01628 631 056 to find out how we can help you with this complex area of corporation tax compliance.