Do you have advances that have been paid to you? Under certain circumstances, these could trigger Section 455 tax. We explain the main rules and considerations below.
If you have share capital or voting rights in a company, you can be classed as a ‘participator’. And where a participator (or an associate of a participator) owes money to a close company, the company may be charged Section 455 tax, along with corporation tax (if any) on the company’s profits.
Confused? Let’s look a little closer at what a participator is, what a close company is, and how Section 455 Tax can impact your tax liabilities.
What does it mean to be a participator in a close company?
A ‘participator’ is someone who has a share, or interest, in the capital, or income, of the company. But, in practice, for our purposes it’s any shareholder of a company.
For these purposes, a participator in a company that controls another company is also deemed to be a participator in that other company.
What is an associate? And what is a close company?
An ‘associate’ includes any relative or partner of a participator. A relative is limited to:
- Your husband, wife or civil partner,
- Your siblings
- Your parents or remote forbears
- Your children or remote offspring.
- Step-siblings where there is no blood-relationship are nor counted, but half-siblings are. ‘Partner’ refers to a member of a general partnership and LLP, but not to informal business partners.
- Trustees of a settlement will be treated as associates where the participator is the beneficiary of the trust, or either the participator or a relative is the settlor of the trust.
Broadly speaking, a close company is any UK-resident company controlled by five or fewer participators, or by any number of participators who are directors.
What is a Director’s Loan Account (DLA)?
In a family or personal company, money transactions occur through a Director’s Loan Account (DLA). Any money that is not a salary, dividend or expense repayment, or money you’ve previously paid into or loaned the company is tracked here.
It could be that you have an overdrawn DLA that was financed by Covid-era loans. In this scenario, you’ll need advice to decide whether Section 455 tax will apply.
What is Section 455 tax? And how does it affect your tax liability?
Section 455 tax is a temporary tax. It’s charged on any amount owing by participators which is not repaid within 9 months and 1 day of the account period in which it’s advanced. The most common example of this kind of advance is an overdrawn director’s loan account.
Let’s explore a bit more detail around Section 455 rules:
- It might be that an amount is repaid after the end of the accounting period. Under some circumstances, the repayment is offset against later advances, rather than being set against that period-end balance.
- Repayments arising by crediting amounts subject to income tax (dividends and salary payments) against the loan can always be offset against the preceding period-end balance. Under some circumstances, other repayments must first be applied against later advances, leaving the earlier amounts potentially subject to the section 455 charge.
- The 30-day rule applies where the participator makes a repayment of £5,000 or more, then takes a further advance within 30 days. The repayment is applied against that further advance, with any excess repayment offset against the period-end balance.
- The arrangements rule applies to any repayment where the loan outstanding is at least £15,000 and, at the time of the repayment, there was either an intention or arrangement to take an advance of at least £5,000 at any time in the future.
- Any amount owing to the company by a participator at the end of an accounting period, and not repaid within 9 months and 1 day, will be subject to a Section 455 charge. From 6 April 2022 the rate is 33.75%, with a rate of 32.5% applying on advances made previously.
- The Section 455 tax is paid at the same time as any corporation tax due for the accounting period in which the advance was made.
- Where an amount on which section 455 tax has been charged is subsequently repaid (in whole or in part) a claim for a refund of the charge can be submitted to HMRC. A claim of this type cannot be submitted until 9 months and 1 day after the accounting period in which the repayment is made. The claim must also be submitted within four years of the end of that accounting period.
Rather than being repaid, the company may want to write the amount off.
For the purposes of Section 455 tax charges and refunds, a write-off like this is treated the same as a repayment. But there are company law, income tax and National Insurance considerations which are outside of the scope of this article.
Talk to us about Section 455 tax
If you have any advances which you believe should be written off, talk to us about the tax and other implications of this.
If you have any questions about the operation of section 455 tax charges, please do contact us on 01752 752210.