R&D Tax Claims Limited
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accountants and tax advisers Copia Wealth and Tax are warning businesses that recent
changes made to the rules on Directors’ Loan Accounts will target corporation tax
The changes to loans made from a company to shareholders were outlined by the
Government in the Finance Bill published in March this year. The legislation was
finalised when the Finance Act became law on 17 July, but the law applies to
repayments of loans on or after 20 March this year and so has immediate effect.
HMRC have identified that some companies have arranged directors’ loans and advances in a way that allows the avoidance of paying tax on the loans.
Mark Evans, managing director of Copia Wealth & Tax, explains the background to the new changes.
“Previously, if a close company, which broadly speaking is a company under the control of participators who are directors, made a loan to one of their participators or shareholders, the company had to make a payment to HMRC if the loan was not repaid within nine months for the accounting period. The amount of the corporation tax, often referred to as s455 tax, is 25 per cent of the loan.
“This tax was included within the corporate tax self assessment system and the company had to report loans outstanding to participators in the year-end tax return. If the loan was repaid after that date, s455 tax was repaid but not until nine months after the end of the accounting period in which it was due for repayment. So, the company had to pay the tax and wait for it to be repaid by HMRC later.
“HMRC had noted that some shareholders would repay a loan or advance made to themselves by the company just before the end of the nine month period, thus avoiding the tax charge. Following the end of the period, the company could provide another loan or advance to the shareholder. Therefore, the shareholder would have the equivalent of an interest free loan and without the burden of paying s455 tax on it.
“Under new legislation, two rules have been introduced. The first is a 30 day rule and applies to loans of £5,000 or more. If at least £5,000 is repaid to the company and within 30 days new loans or advances of £5,000 or more are made to the shareholder or associate, HMRC will treat the first loan as unpaid – so s455 corporation tax on that loan might become due. This rule could be avoided by waiting 31 days before the company advances further funds to the shareholder.
“The second rule covers intention and arrangement and applies where the outstanding amount from the shareholder is £15,000 or more. In addition, the rule applies if, at time the loan is repaid by the shareholder, that person intends to redraw any of that amount from the company or had made arrangements to make a new withdrawal. Furthermore, if, at any time after the repayment, a new payment is made to the shareholder or associate, then the second “intention and arrangement” rule applies.”
The repayment of s455 tax will be restricted by 25 per cent of the lower of the amount repaid and the new payment.
“Our advice to our clients is, when loans or advances on a current account are made to a shareholder, ensure that your accountant clears the amounts within nine months of the accounting period in which the amounts rise”, says Mark. “An established procedure of declaring a dividend or granting of a bonus which is equal to the amount outstanding will continue to remove any s455 tax liability. Company accountants must ensure that any amount is cleared properly and in compliance with Company Law to ensure that s455 tax is not payable.”