When a director borrows loan from a close company (i.e., personal or family-owned company) & remains unpaid, tax liability might arise. This is commonly known as section 455 charge.
This is a charge a company is liable to pay and is based on the loan amount due. So overborrowing from your company might trigger tax liability.
When Does Section 455 Tax Apply?
If you receive loan from your company and do not pay within 9 months and 1 day after the end of accounting period, tax (known as s455 charge) is charged to the company at the rate of 33.75% of the outstanding loan balance.(32.5% before 6 April 2022).
For Example,
Sarah’s company has a year-end of 31 March. She took out £12,000 from the company on 28 February 2022. And paid back £3,000 on 30 July 2022.
Here, loan balance at the end of accounting period (31 March 2022) was £12,000. Within the period of 9 months and 1 day, £3,000 is paid. The remaining amount after 9 months and 1 day (i.e., 1 January 2023) is £9,000.
So, 33.75% of £9,000 (i.e., £3,038) is charged to the company.
Yes. The company can apply for refund and HMRC refunds the tax in proportion to the amount of loan repaid. Or HMRC can reduce corporation tax by the equivalent amount.
Suppose in above example Sarah pays s455 tax of £3,038. Also, out of the remaining loan of £9,000, she repays half of the loan (i.e., £4,500) on 28 February 2023.
As she repaid half of the loan, she can claim back half of the tax she paid (i.e., ½*3,038= £1,519).
When Can The Director Claim Back The Tax Paid?
When claiming for refund, you should refer to the company year-end. The company’s year-end within which the repayment date falls, is important. The claim for refund can only be made after 9 months and 1 day after the relevant year end date.
In above example, s455 tax was paid in February 2023 (i.e., within the company year-end 31 March 2023). So, claim for refund cannot be made until 1 January 2024 (being 9 months and 1 day from 31 March 2023). Refund can be claimed after 1 January 2024.
By When, and How Should The Claim be Made?
The time limit for claiming repayment of s455 tax is four years after the end of the accounting period when the loan was repaid.
In the above example, Sarah repaid the loan in February 2023 (i.e., in the year ending 31 March 2023). Sarah should claim by 31 March 2027 (four years after 31 March 2023).
The claim can be made in CT600A while filing up a corporate tax return (if the claim is made within two years of the end of the relevant accounting period). Otherwise, you need to fill up L2P form (Available at: Reclaim tax paid by close companies). You can fill it up online or after downloading the form.
Where to Send s455 Tax Claim Form?
You can send s455 tax reclaim form to “Corporation Tax Services” department of HMRC.
Do you have more queries?
We, at UK Property Accountants have helped a lot of clients deal with their tax related queries in an efficient way. If you have any queries on tax enquiries or need some advice from us.
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