Cash transactions between a director and a personal or family company are recorded through the director’s account for accounting purposes. At the end of an accounting period, if the director owes the company money, and the company is close (broadly, one that is controlled by five or fewer shareholders (participators)), there will be tax consequences to consider.
Broadly, a tax charge will arise under the Corporation Tax Act 2009, s 455 where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The charge is the liability of the company and is calculated as 32.5% of the amount of the loan. The rate of the charge is equivalent to the higher dividend rate.
The charge however, can be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the period. This can be done in various ways, including:
- the director pays funds into the company to clear the loan;
- the company declares a dividend to clear the loan balance;
- a salary can be credited to the director’s account to clear the loan balance; or
- the company can pay a bonus to clear the loan balance.
With the exception of the director introducing funds into the company, the other options will trigger their own tax bills.
Two further points are also worth highlighting here:
Clearing the loan may not always be beneficial and paying the s 455 charge may be preferable. For example, if the tax on a dividend or bonus credited to clear the loan is more than the section 455 charge.
Once the loan is cleared, the s 455 tax is repayable. This happens nine months and one day after the end of the tax year in which the loan is cleared.
It is also worth bearing in mind that anti-avoidance rules will prevent a director clearing a loan shortly before the section 455 trigger date, only to re-borrow the funds shortly thereafter.
Written by the Tax Advice Network