Clients are often tempted to extract funds from their own companies as loans. That can make sense on a temporary basis, but if the director’s loan account (DLA) is not cleared by the corporation tax payment date, a charge under CTA 2010 s. 455 is due at 32.5% of the loan.
HMRC has noticed that some company directors are trying to avoid the section 455 charge by moving the debt around their associated companies.
Sam owns all the shares in Alpha Ltd which in turn owns all of Beta Ltd. Sam has an overdrawn DLA with Alpha of £1m. Just before the section 455 charge bites, Sam borrows £1m from Beta and clears his loan from Alpha.
In a year’s time, to avoid the section 455 charge due to be paid by Beta Ltd on his overdrawn DLA, Sam borrows a similar amount from Alpha, pays-off the Beta loan and so the debt circles round and round the group.
HMRC is clear that this circulation of the debt doesn’t avoid the s. 455 charge, as the substitution of a fresh debtor, for the original debtor, does not constitute repayment (Corporation Tax Manual CTM 61602).
In Example 1 the section 455 charge is payable by Alpha Ltd as the debt has not been repaid. If the debt has grown while held by Beta Ltd, then Beta will be due to pay the s. 455 charge on the additional amount.
An alternative way to clear the DLA is to transfer an asset from the director to the company, but as this is a connected party disposal the asset must be transferred at open market value.
Jo is the only shareholder of Gamma Ltd, and has an overdrawn DLA of £2m. Jo also owns shares in Delta Ltd which she claims are worth £2.5m. Jo transfers her Delta shares to Gamma and this transfer clears the overdrawn DLA.
However, HMRC discovers that the Delta shares are only worth £250,000. This means the overdrawn DLA was only reduced to £1.75m on the transfer of the Delta shares to Gamma, and a s. 455 charge is due.
Written by the Tax Advice Network