When company directors borrow money from their own businesses for personal finance needs, the repayment process can sometimes become challenging. However, there are effective strategies that can be employed to postpone loan repayments and avoid the s.455 tax charge. In this article, we’ll explore how shortening the accounting period can provide relief and help directors navigate the complexities of director’s loans.
When company directors borrow money from their own businesses for personal finance needs, the repayment process can sometimes become challenging. However, there are effective strategies that can be employed to postpone loan repayments and avoid the s.455 tax charge. In this article, we’ll explore how shortening the accounting period can provide relief and help directors navigate the complexities of director’s loans.
Consider the case of Joe Bloggs, a director at Alpha Services, who borrowed £75,000 from his company in March 2019 to fund a home move. Joe opted for this loan as an alternative to taking out a bridging loan, assuming it would save him from paying interest. His plan was to repay the loan once his previous property was sold. However, due to unforeseen circumstances, such as the potential buyer pulling out, Joe finds himself unable to repay the loan as quickly as anticipated. As a result, he faces the prospect of a significant 32.5% corporation tax charge under s.455 of the Corporation Tax Act (CTA) 2010, amounting to £24,375 payable to HMRC.
To potentially avoid this payment, Joe may need to repay the loan to Alpha Services before the 31st of December 2019. The s.455 tax charge is only applicable if the loan remains unpaid within nine months of the relevant year-end. Typically, repaying the loan through a dividend can offset the loan balance. However, in Joe’s case, this would result in taxable income for him as a higher-rate taxpayer, offering little assistance. Alternatively, Joe could consider borrowing funds from a bank to repay the loan, eventually using the proceeds from the property sale to repay the bank loan. Although this approach incurs interest costs, it remains lower than the tax payable on a significant dividend. However, if Joe faces challenges in securing finance quickly, he may encounter further difficulties.
At Price & Accountants, we recommend exploring a powerful strategy to address this situation: changing the accounting date. By altering Alpha Services’ accounting date to just before the loan was issued, Joe can effectively remove the loan from the records until the next accounting period. This adjustment provides Joe with additional time to sell his property and repay the company without incurring the s.455 charge.
By changing the accounting date, Joe can delay the loan’s appearance in the accounts until the year ending on the new accounting date. For instance, if the loan was issued on the 20th of March 2019 and Joe changes the company’s accounting date to the 28th of February 2019, the loan will not be reflected in the accounts until the year ending on the 28th of February 2020. This grants Joe until the 30th of November 2020 to sell his house and repay the loan without triggering the s.455 charge.
Joe has the flexibility to shorten the company’s accounting period multiple times, but he can only lengthen it once every five years, with certain exceptions. If Alpha Services has not previously changed its accounting date, Joe can choose to revert back to a 31st of March year-end whenever he deems necessary or appropriate.
If you require further guidance regarding tax on director’s loans, our dedicated team at Price & Accountants is here to help. We are committed to supporting small businesses in London and throughout the UK with their accounting needs. Utilizing Xero online accounting software and backed by our expert advisors, we are dedicated to helping.
