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Further information from HMRC

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Clearing a debt when there isn’t the cash

Loan charges

As a director and participator in the company (broadly, someone who owns or controls 5% or more of its ordinary share capital) it’s possible to use its funds occasionally. If money is owed at the end of the company’s financial year which isn’t repaid within nine months, the company must pay a special tax ( s.455 charge ) equal to 33.75% of the debt (reverting to 32.5% in April 2023). The company can reclaim the s.455 tax but it must wait until nine months after the end of the financial period in which the money owed by the director is repaid. It makes sense therefore to avoid the s.455 charge in the first place.

Clearing the debt

But our subscriber has asked: what if a director doesn’t have the cash available to repay the debt? One option is to borrow more money from the company and use it to repay the old debt. This would seemingly clear the potential s.455 charge and create a fresh loan that won’t be liable because the nine-month deadline for repayment hasn’t been reached. HMRC calls this loan “bed and breakfasting” and has anti-avoidance rules to prevent it.

Anti-avoidance rule 1. If you repay £5,000 of what you owe and within 30 days you borrow £5,000 or more, some of the repayment won’t count towards reducing the s.455 charge.

Anti-avoidance rule 2. If you owed £15,000 or more, you repay some or all of it at any time (there’s no 30-day limitation) having previously arranged to borrow more money - in effect reimbursing you wholly or partly for what you repaid.

Example. Javid is a director shareholder of Acom Ltd. At the end of its financial year to 31 March 2022 Javid owes Acom £30,000. If any part of this remains owing after 31 December 2022 Acom must pay s.455 tax. On 1 October 2022 Acom pays a dividend of £20,000 into Javid’s bank. On 20 December Javid repays £16,000 to Acom to reduce the s.455 charge. On 1 March 2023 he borrows another £9,000 from Acom. He knew when he repaid the £16,000 that he was going to borrow more. The second anti-avoidance rule applies. The lesser of the repayment (£16,000) and the new borrowing (£9,000) is ignored and the s.455 charge applies to £23,000 (£30,000 - £16,000 + £9,000).

A lucky loophole?

The anti-avoidance rules include a loophole which can be used to a director’s advantage.

Tip. If instead of Acom paying the dividend into Javid’s bank it reduces the debt he owes wholly as a book entry - that is without transferring any cash - the anti-avoidance rules don’t apply. This might sound too good to be true but don’t take our word for it, the legislation and HMRC agree (see The next step ).

Tip. The anti-avoidance rules wouldn’t bite even if Javid borrowed more from Acom after the dividend has been credited against his debt. This means with the new borrowing (which isn’t caught by s.455 ) he could be in the same financial position as if Acom had received the full dividend into his bank account.

Further information from HMRC