What is Section 455 tax?
Ownership in a company comes with certain responsibilities and one of these can be Section 455 tax. If you, or someone associated with you, holds share capital or voting rights in the company then you are classified as a ‘participator’. Then if this participator (or an associate) owes money to what is known as ‘a close’ – meaning it only has five participants at most – there may also be additional corporation tax liabilities on profits from that debt. With such complexities involved, let’s deep dive into just what makes up a participator and how the implications of having them affects your bottom line through charges for Section 455 Tax…
What does it mean to be a participator in a close company?
Being a participator in a company can open up doors of opportunity – you have an interest, or stake, in the capital and income-producing potentials. For our purposes, this simply means becoming one of its shareholders! This relationship extends further to controlling companies as well; by being part of one enterprise, it makes for a shared investment with others under their domain.
What is an associate? And what is a close company?
Participators on this journey have the opportunity to bring along a loved one – be it their partner or relative. Relatives are further qualified as:
- 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.
A close company is a business based in the UK with five or fewer owners, some of whom may be directors. This type of small-scale enterprise offers an array of advantages such as flexible control and limited taxation obligations.
What is a Director’s Loan Account (DLA)?
For companies and families, managing money can often be a complex task. When it comes to transactions not related to salary or expenses, they’re typically tracked in the Director’s Loan Account (DLA). This account is even more important during this pandemic era – if there has been an overdraft due to loans taken out for Covid-related matters – seeking advice on Section 455 tax may become necessary.
What is Section 455 tax? And how does it affect your tax liability?
Section 455 tax is a consequence that businesses must pay attention to, as it applies when unpaid advances given from the company remain outstanding for longer than 9 months and 1 day. Director’s loan accounts are particularly subject to this charge if payments against them lapse past specified regulations.
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.
Making a write-off when it comes to tax could often be treated in the same way as if you’re making a repayment. However, other important factors – including company law, income tax and National Insurance implications – should also come into consideration before taking any action.
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.
Make sure to use our other resources for further helpful information on everything tax!
If you have any questions about the operation of section 455 tax charges, please do contact us.