Rules were announced to penalise those who abuse company loans to avoid paying S455 tax
In 2013 new rules were announced to penalise those who abuse the rules on company loans. This is directors who borrow money from their company, repay it to avoid the corresponding S455 tax charge and then re-borrow the money a short while later. HMRC calls this “bed and breakfasting” and new rules aim to penalise this.
Background
A client’s company is liable to a tax charge (called S455 tax) where a director/shareholder borrows money from it. The charge for a company’s accounting period is 33.75% of what the director owes at the end of the financial year, but if the loan is repaid within nine months of the financial year end the S455 charge is reduced or wiped out.
The new rules
1. 30-day rule
Where a director repays more than £5,000 of the money they’ve borrowed from the company and within 30 days of this re-borrows more than £5,000, the reduction that’s normally allowed in the 33.75% tax charge will be restricted by the lesser of the amount repaid and the amount re-borrowed.
2. Intentions and arrangements rule.
Where the amount owed by a director is £15,000 or more, a full or part repayment of this is made and at the time the director had arranged to re-borrow the money from the company or had the intention to do so, the reduction in the 33.75% tax charge is
restricted in a similar way as it is for the 30-day rule. There is an exception to this rule – if a dividend (or a salary bonus) is voted and is credited to the loan account, the loan will be treated as repaid by that amount.
Example 1:
At year end, Mr X has a Directors loan totalling £12,000 (the loan amount is less than £15,000 so Rule 2 won’t apply here). He repays £10,000 shortly after his year end, and anticipates paying S455 tax on a loan balance of £2,000. However within 30 days of repaying the loan, he takes a further loan of £8,000. Mr X will now pay S455 tax on a loan balance of £2,000 + £8,000 = £10,000.
Example 2:
At year end, Mr X has a Directors loan totalling £85,000 (the loan amount exceeds £15,000 so both Rule 1 and Rule 2 apply here). He repays £80,000 shortly after his year end, and anticipates paying S455 tax on a loan balance of £5,000. However he knew he would need at least £70,000 within 3 months of repaying the loan – and sure enough 3 months later he borrowed £70,000 from his business. Mr X will now pay S455 tax on a loan balance of £5,000 + £70,000 = £75,000.
Example 3:
At year end, Mr X has a Directors loan totalling £6,000 (the loan amount is less than £15,000 so Rule 2 won’t apply here). He repays £4,000 shortly after his year end, and anticipates paying S455 tax on a loan balance of £2,000. However within 30 days of repaying the loan, he takes a further loan of £4,000. Because Mr X has re-paid and re-borrowed less than £5,000 Rule 1 does not apply and his original S455 calculation is correct.
Interest payable
The rules regarding interest have not changed. The HMRC regard a loan of over £10,000 as a personal taxable benefit. Note the entire loan is assessed as a personal benefit, not just the amount exceeding £10,000. To eliminate the personal taxable benefit, you need to pay your company interest from your personal bank account on the loan balance at a rate equal to the HMRC beneficial loan rates.