If at the end of the financial year a director, shareholder or other related party to a company has an overdrawn loan account then an additional tax may be due. The tax itself is often referred to as “S455 tax” as this corresponds to the tax legislation.

S455 tax is applied to a director’s loan account balance where the Director has withdrawn money out of the company so that the Director then owes money back to the company.

Your personal and company tax responsibilities depend on how the loan is settled, and you may have extra tax responsibilities if the loan was more than £10,000 or you paid the company interest on the loan below the official rate (2.25% from 6 April 2020, subject to necessary Treasury regulations coming into force).

S455 tax is a tax applied to the company at 32.5% of the overdrawn balance at the end of your corporation tax accounting period. The S455 tax is only a temporary tax provided balances are repaid and mimics the rates for dividend taxes.

If the loan is repaid by the director within 9 months of the accounting period end, S455 may not be payable, but has to be declared on form CT600A when you prepare the company tax return to show the amount owed, and confirmation of repayment of the loan within 9 months.

If the Director does not repay the loan within 9 months of the accounting period end, S455 tax liability is payable to HMRC. Only once the loan has been permanently repaid can the S455 liability be reclaimed, but any interest charged is again not reclaimable.

You cannot repay the loan within 9 months then withdraw the same amount or more out of the company shortly after repaying, as this is not considered permanent repayment of the original loan.

The reclaim can then only be made 9 months after the end of the accounting period in which repayment is made.

If the loan was more than £10,000 at any point in the year and you are a shareholder and director, the company must treat the loan as a ‘benefit in kind’ and deduct Class 1A National Insurance. The director must then report the loan on a personal Self Assessment tax return and may have to pay tax on the loan at the official rate of interest.

You must reclaim within 4 years of the loan being repaid otherwise you will lose your entitlement to the reclaim. If you’re reclaiming within 2 years of the end of the accounting period when the loan was taken out, use form CT600A to claim when you prepare your Company tax return for that accounting period.

If you are reclaiming 2 years or more after the end of the accounting period when the loan was taken out, complete form L2P and either include with latest Company tax return or post to HM Revenue & Customs separately.

Repayments from HMRC will either be via details provided in the latest Company tax return or via cheque to the company’s registered office address.

The rules are complex and it is essential to stay on top of balances and what is due to HMRC and what is recoverable from HMRC.

If you would like any assistance with this or any other matters please do not hesitate getting in touch with one of the team on 01494 552100 or enquiries@stca.co.uk

This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at time of publishing 25 February 2021.

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