CORPORATION TAX - 22.01.2016

Borrow from your company, but avoid the tax charge

Using company funds

HMRC has always discouraged director shareholders from borrowing money from their companies by means of a special tax, known as a s.455 charge. The amount of the charge is equal to 25% of the sum the director shareholder owes and hasn’t repaid within nine months of the end of the accounting period in which the borrowing occurred. Until tough rules were introduced in 2012/13 it was relatively easy for companies to dodge some or all of the s.455 charge by using a process called bed and breakfasting.

The end of bed and breakfasting

Bed and breakfasting involved borrowing more from the company and using it to repay the original debt within the nine-month deadline. That meant the s.455 tax was rolled forward to the following financial year, when, if necessary it would be bed and breakfasted again. This trick is no longer possible.

Nine months

As bed and breakfasting is no longer effective, the only way to avoid s.455 tax is for you to repay your company what you owe it within the nine months following its financial year end. If you can’t afford to do that from your own resources, the anti-bed and breakfasting rules allow you to use the company’s money to do it, but only where it counts as your taxable income.

Taxable income - dividend or bonus

Where your company approves payment of a dividend or bonus within nine months of the end of its financial year it can use it to reduce the amount you owe it. This will correspondingly reduce the s.455 tax payable. If your company can’t pay a dividend or bonus, the good news is that there’s an alternative way to avoid the s.455 bill that doesn’t involve repaying the debt.

Tip. Changing your company’s financial period to end on a date before you borrowed money from it means there will be nothing for the s.455 charge to apply to (see The next step ).

Example. Gerry is a director of Acom Ltd. Its financial year ends on 31 December. In October 2015 Gerry used £50,000 of Acom’s money to build a home extension. If he repays the debt by 30 September 2016, i.e. within nine months of 31 December 2015, s.455 tax won’t apply, but Gerry can’t afford to and Acom doesn’t have enough cash to pay a dividend or bonus to cover the debt. Acom shortens its 2015 financial year to end on 30 September 2015. At that time Gerry hadn’t borrowed the money and so s.455 tax isn’t applicable. Gerry has until nine months from the end of Acom’s next accounting period, i.e. 30 September 2017, to repay the loan or for the company to clear the debt with a bonus or dividend.

Tip. If you can’t shorten your financial period enough to eliminate a director’s borrowing entirely, choose a point in time when the debt was at its lowest. This will at least reduce the s.455 charge. Shortening an accounting period brings forward the date of payment of the company’s usual corporation tax bill, so keep this in mind when deciding on the new financial period end date.

How to change a company’s financial period, visit http://tipsandadvice-tax.co.uk/download (TX 16.08.03).