The 'section 455 charge'

Newsletter issue - February 2019.

For accounting purposes, cash transactions between a director and a personal or family company are recorded through the director's loan account. At the end of an accounting period, if the director owes the company money (i.e. the account is considered overdrawn), and the company is close (broadly, one that is controlled by five or fewer shareholders (participators), there will be tax consequences to consider.

A tax charge will arise under the Corporation Tax Act 2009, s 455 where a director's loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge is the liability of the company and is calculated as 32.5% of the amount of the loan. The rate of the charge is equivalent to the higher dividend rate.

Example

Nicola is the director of her personal company N Ltd. The company's financial year end is 31 March.

On 31 March 2018, Nicola's loan account is overdrawn by £20,000 and it remains overdrawn by this amount on 1 January 2019 (the date on which corporation tax for the period is due).

The section 455 charge, payable by the company is £6,500 (£20,000 @ 32.5%).

Avoiding the charge

Even if the loan account was overdrawn at the end of the accounting period, the section 455 charge can be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the period. This can be done in various ways:

  • the director can pay funds into the company to clear the loan;
  • the company can declare a dividend to clear the loan balance;
  • the director's salary can be credited to the account to clear the loan balance; or
  • the company can pay a bonus to clear the loan balance.

It should be noted however, that with the exception of the director introducing funds into the company, the other options will trigger their own tax bills.

Two further points are also worth highlighting here:

  • Clearing the loan may not always be beneficial and paying the s 455 charge may be preferable. For example, if the tax on a dividend or bonus credited to clear the loan is more than the section 455 charge.
  • Once the loan is cleared, the s 455 tax is repayable. This happens nine months and one day after the end of the tax year in which the loan is cleared. It should also be noted that anti-avoidance rules apply to prevent the director clearing a loan shortly before the section 455 trigger date, only to re-borrow the funds shortly thereafter.

What our clients say about us...

  • "Paul has provided accountancy services to my company for 2 years now. I can recommend Paul very highly; his skills as an accountant are highly detailed and professional and he is always available to provide advice. One aspect of the way Paul works that I greatly appreciate is a preference to meet face to face when there is a detailed conversation to be had. I personally find this more productive and is a benefit of working with a small accountancy firm that you wouldn't get with the large faceless providers."

    ALISTAIR FAIRWEATHER - PROGRAMME & PROJECT MANAGER, DELIVERING/RESCUING I.T. 7 BUSINESS CHANGE WITH BUDGETS UPTO £50M INC SUPPIER MANAGEMENT

  • "I couldn't ask for more from Paul as an Accountant. Paul has been accountant to Work Relief Charity Recruitment for just over a year now and is proving an invaluable asset. Accurate, knowledgeable, flexible with an emphasis on service delivery, I would recommend Paul's services to any organisation looking for an accounts professional."

    Neil Price - Managing Director at Work Relief Charity Recruitment

  • "Paul was a referral from a family member when I started my business 2 years ago. As this was the first time I had ever run my own company I was totally clueless over the financial side of matters and was worried that I may have made mistakes in any of my accounting. I needn't have worried as after enaging Paul for a set monthly fee he was always there on the end of the phone for all sorts of questions I had and no matter how trivial they were Paul gave me all the information I required and more and did an excellent and painless job at the end of my first year! Couldn't ask for any better to be honest. Just two words - hire him!!!"

    Lee Westrap MBCS - Director - Bulldog IT Services

Request a Callback
Please complete our form
to request a callback
Get a Fixed Quote

Competitive fixed quotes
for agreed services

Find out how to Make more, Keep more and Work less

Increase your profit and
reduce tax liabilities

Your Business Size?

Expert advice for your
business size

 

Marker

Booth & Co  |   The Hermitage  |   15a Shenfield Road  |   Brentwood  |   Essex  |   CM15 8AG        Telephone: 01277 224666    |   Email: info@boothandco.co.uk