The 'section 455 charge'

Newsletter issue - February 2019.

For accounting purposes, cash transactions between a director and a personal or family company are recorded through the director's loan account. At the end of an accounting period, if the director owes the company money (i.e. the account is considered overdrawn), and the company is close (broadly, one that is controlled by five or fewer shareholders (participators), there will be tax consequences to consider.

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 tax 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.

Example

Nicola is the director of her personal company N Ltd. The company's financial year end is 31 March.

On 31 March 2018, Nicola's loan account is overdrawn by £20,000 and it remains overdrawn by this amount on 1 January 2019 (the date on which corporation tax for the period is due).

The section 455 charge, payable by the company is £6,500 (£20,000 @ 32.5%).

Avoiding the charge

Even if the loan account was overdrawn at the end of the accounting period, the section 455 charge 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:

It should be noted however, that 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:

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