To cope with the effects of the pandemic, some businesses have changed their financial year end to delay tax or bring forward relief for losses. But might this also trigger an unexpected tax charge for director shareholders who have borrowed from their company?

Loan to a participator

In tax jargon a director shareholder is a “participator” in a company. HMRC aggressively taxes loan arrangements between participators and their companies. S.455 Corporation Taxes Act 2010 says that where a participator owes money to their company, it must pay tax of 32.5% of the debt as it stands at the end of its accounting period, but only to the extent it hasn’t been repaid within nine months.

No escape clause

The nine-month rule is helpful, but if you aren’t able to repay your company within that time the 32.5% corporation tax (CT) charge will apply. Plus, there are anti-avoidance rules to prevent you from dodging the charge by borrowing more from the company and repaying the original debt.

Ways to repay

The usual solution is for your company to pay you a dividend or bonus within the nine months so that you have enough to repay the loan. But if it’s short on profit, this might not be an option.

Tip. Your company can change its financial year so that it ends at a time before the money was lent to you. As a result, the loan will disappear from your company’s accounts and the 32.5% tax bill won’t apply.

Example. Roger is a director of Acom Ltd. Its accounting year ends on 31 March. In February 2021 Roger had an extension added to his home and borrows £30,000 from Acom to help pay for it. If he repays the loan by December 2021, i.e. nine months from the end of Acom’s 2021 financial year, there will be no s.455 tax. In September 2021 Roger realises that he can’t afford to repay Acom, so a s.455 charge of £9,750 looms. However, Roger’s quick-thinking accountant suggests Acom changes its accounting date to 31 January 2021 because at that time Roger hadn’t borrowed from Acom. Hey presto, the s.455 charge disappears.

Trap. Shortening an accounting period brings forward the due date for CT. In our example, Acom must pay CT on its profits for the ten-month accounting period to 31 January 2021 on 1 November 2021, instead of twelve months ended 31 March 2021 on 1 January 2022.

Tip. If there’s no point in time where the amount owed by the participator is zero, the s.455 charge can be reduced by selecting a new accounting date when the loan balance was at its lowest.

Time to pay

Roger has nine months from the end of Acom’s next accounting period, i.e. 31 October 2022, to repay the loan and save Acom from a tax bill. Even if he can’t repay it all, anything he does will reduce the s.455 charge proportionately.

Tip. A similar trick might also be possible where a participator repays all or some of a loan soon after the end of an accounting period. In that situation the solution is to extend the accounting period to a date after the repayment was made.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.