Kate Gott Corporate Tax Director

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Kate Gott

Corporate Tax Director

Kate joined Wilson Wright in 2016, having predominantly worked within the UK’s top 10 accounting firms over the previous decade.

She is a chartered tax adviser specialising in advising businesses and their owners. She works for a wide range of clients, including companies, LLPs and partnerships.

Her areas of expertise include research and development tax credit work, both international and domestic tax efficient structuring, transfer pricing, and due diligence. Kate also has significant experience of working with private equity structures and professional service firms.

She works closely with her clients to ensure they keep up to date with their tax compliance obligations and are aware of tax planning opportunities and changes to the tax legislation that may affect them.

1 Mar 2022

What’s changing?

The tax rate on dividends and the amount of the s455 charge will increase from 32.5% to 33.75% as of 06 April 2022.

What are Close Companies?

A close company is a privately owned (i.e. by shareholders) one controlled by five or fewer individual participators (i.e. shareholders) or any number of participators if those participators are directors.

What belies this seemingly simple definition are a number of technical stipulations relating to ‘control’ and ‘associates’, which is all very interesting but beyond the focus of this particular article and where you would like further information on this, please do feel free to get in touch.

Most small companies and many family companies are close companies.

What is an s455 Tax Charge?

When a company advances a loan to a director, there is a risk of triggering an s455 charge. If a director draws money from the company bank account or spends money from the company account on personal items, which wasn’t owed to him or her by the company, this creates a debt to the company. If that same director is a shareholder (in a close company) then this overdrawn director’s loan account, triggers what HMRC term: a loan to a participator.

If an overdrawn director’s loan account remains outstanding to the company, nine months and one day after the end of the company’s accounting period, this creates a charge to s455 tax. So, any overdrawn loan accounts repaid within nine months of the end of the accounting period will not be subject to a s455 charge.

In fact, certain arrangements can mean that even those directors who are not currently shareholders could be caught out by the s455 charge, but again, that’s beyond this article!

The s455 charge is more commonly known as an ‘additional CT charge’ as this charge forms a part of the company’s corporation tax liability at 33.75% of the outstanding director’s loan balance.

In summary a s455 tax charge is a 33.75% tax applied to an overdrawn director’s loan account, which is outstanding nine months and one day after the end of the company’s accounting period.

How does it work?

When submitting a Company Tax Return the company must submit an additional form (CT600A) detailing the loans to the participators (dates and the amounts outstanding). HMRC will levy a tax charge (33.75% from 06 April onwards) on the amount outstanding.

In future years, the following occurs:

• If left outstanding, in subsequent years, with no increase in the amounts borrowed, then no further amounts will be due to HMRC on the outstanding and unchanged participator loan
• If the amounts increase, then HMRC will levy further additional CT charges on these increments
• The charge is always a flat rate, from April 2022 this charge will be at a rate of 33.75%
• Amounts repaid, in subsequent periods, will attract a refund of the s455 charge and so the S455 can be viewed as a temporary charge only (in lieu of income tax on dividends)
  • The s455 refund will be computed by multiplying the amount repaid by the respective s455 rate applicable at the end of the company’s accounting period
  • The refund itself will not be forthcoming, however, until nine months and one day after the accounting period in which the loan was repaid to the company and will only be repaid if the taxpayer (or their accountant) informs HMRC of the repayment, by (yes, you guessed it) filling in and submitting the relevant forms
  • For example, if a director has a brought forward an overdrawn director’s loan account balance of £100k at the start of their accounting period ended 31 December 2021, and they repay the £100k midway through the 2021 accounting period, say 30 June 2021, they will not be able to apply for a refund until nine months and one day after the end of the accounting period of repayment i.e. 01 October 2022. As such, timing is an important consideration when making loans to directors.

Maximising s455 Refunds

One of the more often overlooked factors of s455 charges is how to best fast-track refunds.

The operation of s455 refunds (triggered by repayments of overdrawn amounts by participators), unless otherwise disclosed upon repayment, will result in refunds allocated on a on a first-in, first-out basis (FIFO) basis.

HMRC’s default FIFO refunding model means that the oldest loan amounts (i.e. the most aged loans) will be considered to have been paid first and in chronological order thereafter.

The s455 tax charge has increased over time and so this means the rate of refunds will begin at the lowest rates, leading to lower increments of s455 for partial loan repayments.

To expedite and increase s455 refunds the participator can specify their loans have been repaid in reverse chronological order and by doing so and starting with the most recent loans HMRC will refund at the at the highest rate of s455 tax suffered.