What is S455 Tax? Tax Rates & Changes on Outstanding Loans

• Approval from Shareholder (usually by normal resolution) is obligatory for loans in addition of £10,000 (the maximum is £50,000 in case the loan amount is to meet expenses on company business)
• A Director is eligible to get a loan from the business as long as the business is not in monetary trouble and subject to agreement under the 2006 Companies Act and necessities of the company's articles
• The board should come to an agreement on the loan terms and document them in view of that

Recent updates

• Starting 6 April 2016, the tax applicable on unpaid loan amount increased to 32.5% for advances, loans, and provisions made on or post 6 April 2016
• The revision was publicised in 2016 Budget and presented through the 2016 Finance Act

What is S455 Tax? What are the 455 Tax Rates?

S455 is a corporation tax which is levied when a Director of a company borrows money from the business and he/she is unable to return the amount within a certain time period.

If a company’s director withdraws a certain amount from the business as a loan, as per the rule, the business will not have to pay any additional tax on it if the entire amount which was taken, is paid back within nine months post the completion of the company’s tax year. S455 corporation tax is charged at 32.5% on the loan amount or outstanding loan.

A Directors’ loan account can be in debit or in credit. If the Directors’ loan account is in credit, the company owes money to the Director and if the account is in debit, the Director owes money to the company. In case a Director owes money to his/her business, such a scenario is time and again stated as an ‘overdrawn directors’ loan account’. The following conditions must be met to permit a business to offer money to its Director:

• The company should comply with the 2006 Companies Act
• The company should not be in tough monetary circumstances
• The company should be in compliance with the corporation’s articles of association
• In case the company turnover is below £10,000, shareholder consent is usually not required
• In case the company turnover is above £10,000, shareholder consent is provided through an ordinary resolution at a board meeting
• The amount required to meet company expenditure cannot be in excess of £50,000

Since, directors’ loan account could be settled and restructured at the conclusion of the year, HM Revenue and Customs (HMRC) was concerned about the easily flowing transactions of directors’ loan accounts. A clever and smart accountant has the skills to manipulate the account, which can result in considerable tax savings for a Director.

A Director's loan account is merely an explanation in the balance sheet that reviews the dealings between the company and a company director.

It is somewhat common for a Director to get money from his business, however, this can result in a provisional tax charge as HM Revenue and Customs will treat it as an amount received of an interest-free director's loan.

A Director’s loan is defined as an amount received, by an individual or his/her other family members, which doesn’t form part of the following:

• An expense repayment or dividend or salary
• Money an individual has formerly introduced into the company or loaned the company

A company Director must keep a track of the amount he/she has paid into the company or borrowed from the company i.e. keep track of the ‘director’s loan account’.

Let’s understand this with an example: Assume Pete took a loan of £30,000 from the business in Jun-17 and business year end on 31st March 2018. This mean the company Director has nine months post 31st March to return the loan amount of £30,000 – hence; the amount must be returned or deposited back by 31st January 2019.

However, if the Director is unable to pay back the loan amount of £30,000, he/she will be charged under S455 section of corporation tax return CT600. Hence, the corporation tax bill will be £9,750. Also, if a Director has paid an in credit directors’ loan account equivalent to £10,000 then S455 corporation tax will be charged, at 32.5%, on the remaining balance of £20,000.

Tax changes on outstanding loans

• When a Director of an organisation takes a loan from the company, the pending loan amount, if not paid within 9 months post the closure of the company’s accounting period end, will result in the payment of tax under S455 CTA 2010
  • Tax is payable 9 months and one day post the completion of the accounting period in which the obligation arises.
  • S455 tax is payable at 32.5% on the outstanding loan amount made on or post 6 April 2016 (or 25% on loan amounts taken prior to April 6).
• If a Director has two loan accounts and each is accounted distinctly for reporting purposes, and either of the two loan accounts is over the limit then in such a scenario HM Revenue and Customs (HMRC) may resist combining both the accounts for tax and hence the two will not be treated as one net balance.
• Two Directors in an organisation (usually spouses) may decide amongst themselves to permit a counterbalance so that one person’s loan credit is set off against the other person’s loan debit. Usually, HMRC does not admit such an offset except if there is proof to verify the intent to form a combined loan account.
• Loans taken or given to Directors who are not participators in the business are not within the range of S455.

Additional information

In case a company closes the business and write-off is made with regards to a Director who is a participator in the company being closed and the company also was imputable to a S455 CTA 2010 charge, then in such a scenario the loan amount written off is overtaxed as if it is a circulation under S415 ITTOIA (Income Tax (Trading and Other Income) Act) 2005.

This means that the loan amount that is to be written off is considered as net income received after subtractions of notional tax from the tax return of participator, however, the tax credit cannot be paid again: it is a dividend.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.