Loans and other cash advances your company makes to those who control it can trigger tax charges, but there are exceptions. When can you take advantage of these?
S.455 charge
Where a “participator”, e.g. a shareholder, of a close company (that’s one controlled by five or fewer individuals) borrows money from their company and still owes it nine months after the end of the accounting period in which it was borrowed, a tax charge (a s.455 charge) may be triggered. The tax is equal to 32.5% (33.75% for loans after 6 April 2022) of the debt at the end of the accounting period. While it’s refundable after the accounting period in which it’s repaid, it’s a burden on the company until then. However, there are exceptions to the tax.
Directors excluded
The s.455 charge is often referred to as applying to “directors’ loans”, but it only relates to loans and debts involving participators (shareholders). A participator is anyone who directly or indirectly owns any of the company’s share capital or has current or future rights to it, or the right to the voting powers associated with share ownership.
Tip 1. A loan to, say, a sales director who owns no shares or shareholders’ voting rights, doesn’t trigger a s.455 charge even if they have a place on the company’s board.
Tip 2. Where a director is a participator a s.455 charge won’t apply if they own or control less than 5% of the company’s voting rights and the following applies:
- the total owed by the participator to the company or an associated company doesn’t exceed £15,000; and
- they work full time for the company or an associated company.
Commercial terms
Contrary to popular belief, a s.455 charge isn’t avoided where a loan is on commercial terms, i.e. is subject to interest and conditions that match those a bank or other authorised lender would apply to a loan made to a member of the public.
Tip. If your company’s normal business includes lending money and the loan is on its normal commercial terms, there’s no s.455 charge.
Trading with your company
Another exception to the s.455 charge is where you owe your company money for goods or services it supplies you as part of its normal business.
Example – part 1. Fred owns a second-hand car dealership. His son wants a car and Fred provides one from stock. Fred therefore owes his company the price of the car. Any of the debt which is settled within the time Fred’s business would normally allow a customer to pay (or six months if that’s longer) can be ignored for s.455 purposes.
Example – part 2. Fred’s company Acom Ltd offers a year’s interest-free credit to customers who spend £10,000 or more on a car. If in example – part 1 the car (which had a forecourt price of £10,500) was supplied to Fred’s son on 1 March 2022 and Acom’s financial year end was 30 April, the debt won’t count for s.455 purposes if the credit period was for not more than a year.
Tip. Don’t assume that a s.455 charge applies to every debt you owe your company. Analyse each constituent part of the total debt to see if one of the exceptions applies.
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.