You’ve decided to close a subsidiary of your main company. Your loan account with the subsidiary company is in the red by nearly £20,000. If the subsidiary is wound up, what tax liabilities might this trigger?
S.455 charge
If a company participator owes their company money a special tax can apply, known as the s.455, for example, where a director’s loan account is in the red. The charge only applies where the company is a “close company”, Broadly, a close company is one that’s resident in the UK and is controlled by five or fewer individuals.
Who counts as a participator?
Shareholders and others who control the company’s share capital are participators. For the purposes of the s.455 charge a participator of a company also counts as a participator of a subsidiary. For example, if Bob owns all the shares in Acom Ltd and it owns all the shares in Bcom Ltd, Bob is a participator of both companies. The s.455 tax, which is payable by the company, is equal to 33.75% of the amount borrowed by the participator that’s still owing after nine months following the end of the company’s accounting period in which the borrowing occurred.
S.455 for solvent and insolvent companies
If a company is insolvent the liquidator will usually require the debtors, including the company’s owner managers, to repay some or all of what they owe to go towards paying off the company’s creditors. If any s.455 tax has been paid on the debt it’s refundable to the company if the debt is repaid. If the company is solvent and it’s being closed voluntarily, there is a different way to handle the debt.
Cleared or uncleared debts
If a compnay owner manager clears their debt before their company is fully wound up, no s.455 charge applies or if it has already applied then the tax is refundable. But where a company owner manager doesn’t clear their debt an anti-avoidance rule treats it as having been written off. This counts as a distribution which is taxable in the same way as a dividend. Plus, there’s potentially a Class 1 NI charge at 13.8% on the amount written off.
Tip. The tax and potential NI charges can be avoided if the debt is in a group company and it is transferred to one of the other group companies before the wind up commences. The s.455 charge will still apply if the £20,000 owed hasn’t been repaid by the nine-month deadline, but will be refunded by HMRC if and when it is.
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