What is S455 tax, the Directors Loan Account and who pays it?  

What is S455 tax?

Let’s start with the basics, to put it simply, S455 is a corporation tax.  It’s used when a director of a company borrows money from their business and is unable to return the full amount during a certain time period.  

When should you pay the S455 tax? 

If due, this should be paid along with the company’s corporation tax. 

What is a director’s loan account?  

A director’s loan account “DLA” is an account on a company financial record that keeps track of all transactions between the director and the company (a virtual account which exists only in your accounting records – it can be in debit or in credit). If it’s in credit, the company owes money to the director and if the account is in debit, the director owes money to the company (sometimes referred to as an overdrawn director’s loan account). 

A Director’s loan is defined as an amount received, by an individual or their family members, which isn’t an expense repayment, dividend, salary, or a return of money that an individual has formerly introduced into the company or loaned the business. 

How does DLA link with S455 tax? 

It’s important that the director keeps track of the amount that they have paid into the company or borrowed from the company. 

If for some reason the director is unable to pay back the loan, they will eventually be charged under S455 section of corporation tax return CT600.  

It can be common now and again for a director to get money from their company, but this can result in a provisional tax charge. 

How long do you have to pay back a director’s loan?  

It is payable nine months and one day from the end of the relevant accounting period. The Autumn Budget 2021 raised the rate of tax charged under section 455 on loans to participators from 32.5% to 33.75% from 6 April 2022. However, the S455 rates were 32.5% to April 2022 and 25% for loans made before 6th April 2016.

This is in line with when any corporation tax is due. Eg for a Year ending 31st December the loan will need to be repaid by the end of the following September to ensure a charge is not incurred. 

Tax changes on outstanding loans

It is important that the pending loan is paid within 9 months and one day post the closure of the company’s accounting period end – to avoid payment of tax under S455 CTA 2010. It’s payable at 32.5% on the outstanding loan amount made. Therefore, if part of the loan is repaid within 9 months, then tax will only be due on the outstanding amount. 

So, what happens if multiple directors have loan accounts? 

If each is accounted separate for reporting purposes, and either of the two loan accounts are over the limit then in such a scenario then the HMRC may not combine both the accounts for tax and hence the two will not be treated as one net balance. In a scenario where there are two Directors in an organisation, they have the option to decide to permit a counterbalance – this means that one person’s loan credit can be set off against the other person’s loan debit. Usually, HMRC does not admit such an offset except if there is proof to verify the intent to form a combined loan account. Loans taken or given to directors who are not participators in the business are not within the range of S455. 

What happens in the case of a company closing? 

If there are funds available to clear the loan 

If the money has been borrowed by a participator (shareholder), then it can be written off and the amount written off is treated as a distribution (like a dividend payment). 

If the person is not a participator, it will be treated as taxable income – that is subject to income tax and National Insurance Employees’ Contributions for them and National Insurance Employers’ Contributions for the company. 

For participators, it must be written off via a resolution passed at a board meeting. 

Because any write off is distributed in the same way as a dividend, it’s not an expense so it won’t lower profits to bring down your Corporation Tax. 

If you have paid the S455 corporation tax on the overdrawn amount, you make a claim for the money back from HMRC for your company using Form LP2. 

If there are not funds available to clear the loan 

If the company is being closed and there are not funds available to distribute them then the director will need to repay any amount they owe to the company. 

If an insolvency practitioner has been instructed, they will be within their rights to chase the money from you. 

If there are still outstanding creditors remaining and you write off the loan prior to closing the company, expect an insolvency practitioner to question the circumstances as to how the write-off occurred. The practitioner then may take the view that this was an action that was prejudiced against the company’s creditors. 

Still have questions? Here at Farnell Clarke, we are always happy to help. Feel free to contact us at any time here.