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:
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:
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
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.