The Finance Act 2013 affects the tax on loans from a company to its Shareholder or Directors. Some of the rules took effect on the 20th March 2013. This post gives you a bit of background to this Act and the differences that now affect Shareholders or Directors:
What was the position for loans made before 20 March?
If a close company makes a loan to a participator (e.g. most shareholder/directors in unquoted companies), it pays tax to HMRC if the loan is not repaid within nine months of the accounting period end. The amount of the tax, (s455 tax) is 25% of the loan. This tax goes on the corporate Tax Return – as a company must report loans outstanding to participators at the end of the accounting period.
If the loan is repaid after the nine months, s455 tax will be repaid but not until nine months after the end of the accounting period of repayment. Thus HMRC will hold the s455 tax for over a year.
A loan includes a current account that many Shareholder/Directors have with their company. A loan to an ‘associate’ of a Shareholder/Director, such as a relative, is also included as if the loan had been made to the Shareholder/Director.
What has changed post-20 March 2013?
Previously (under old rules) Shareholders/Directors often repay loans or advances just before the nine month period ends – so no tax arises. Shortly afterwards the company provides another loan to them. Therefore the Shareholder/Director has continual use of the money from the company but the company pays no s455 tax.
The new law potentially catches such arrangements with two new rules:
The first is a 30 day rule 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/Director (or an associate), the old loan is treated as if it has not been repaid. Thus s455 tax may become due.
The second is an intention or arrangements rule. The first rule could be avoided by waiting 31 days before the company advances further funds to the Shareholder/Director. The second rule applies where:
- the outstanding amount from the Shareholder/Director is £15,000 or more;
- at the time the loan is repaid by the Shareholder/Director, 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/Director or an associate.
The repayment of s455 tax will be restricted by 25% of the lower of the amount repaid and the new payment.
This law applies to repayments of loans on or after 20 March 2013.
What should be done by the company and Shareholder/Director so that the s455 tax does not arise?
If loans or advances on a current account are made to a Shareholder/Director, the amounts need to be cleared within nine months of the accounting period in which these amounts arose. The procedure of declaring a dividend or granting of a bonus which is equal to the amount outstanding will continue to remove the s455 tax liability. However the amounts must be cleared properly, in compliance with company and the revised tax law.
If you have a question about a loan that your company has given you and what effect it has on s455 tax liability, please comment below and I’d be happy to give you some guidance.
Alternatively, give me a call on 01788 577 613 or email me on email@example.com to contact me personally for some advice.
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