Joined up bookkeeping saves tax on directors’ loans

Several years ago you made a loan to your company. Since then you’ve drawn on company cash to pay private expenses. On balance you’re in the black but HMRC says your cash drawing is separate from the loan and is taxable. Can it be right?

Joined up bookkeeping saves tax on directors’ loans

Loans to shareholders

HMRC has a long-standing aversion to director shareholders, especially in small and medium- sized firms, using company funds for private purposes even where it’s within company law. HMRC charges a special temporary tax, known as the s.455 charge, payable by the company, to dissuade director shareholders from using company money.

Tax charge and refund

The s.455 charge applies where a director shareholder owes money to their company at the end of its financial period and which is still owed nine months later. The tax is equal to 33.75% of that amount and is refundable nine months after the end of the financial period in which the debt is repaid.

Loans not aggregated

An unfairness of the s.455 charge is that the legislation, according to HMRC, doesn’t aggregate all transactions between a director shareholder and their company. This means they might be owed money by their company on the one hand, borrow from it with the other and the s.455 charge applies to the latter without taking account of the former.

Example. In 2015 Henry started Acom Ltd. It needed working capital which Henry provided as an indefinite loan of £100,000. There were no terms or conditions on the loan but Henry would only require repayment as and when Acom could afford it. As is typical, Henry used Acom’s bank account to pay the occasional personal bill. Also, as is common practice for directors, he paid some company expenses, mainly his business travel costs, personally. Over the course of each accounting period the business expenses he paid always just outweighed the personal bills paid by Acom. In early 2023 Henry borrowed £20,000 of company funds to buy a car, which he intends to repay over three years, and at the end of the 2023 accounting period Acom owed Henry £80,500 (£100,000 - £20,000 + £500 business expenses met by Henry). This position remained unchanged nine months later. HMRC’s view is that Acom is liable to a s.455 charge on £20,000, i.e. £6,750.

Loans aggregated

In our example, HMRC’s view is that each loan arrangement is separate because they are recorded separately in Acom’s records. Case law supports HMRC’s view to a degree but this does not stop the s.455 charge from being unfair. In practice, there’s no chance of persuading HMRC to consider the loans in aggregation. However, there’s a solution.

HMRC accepts that loan balances can be aggregated if company records show that borrowing and lending is managed as a single balance. To prevent avoidable s.455 charges make sure your bookkeeper aggregates all debit and credit transactions between you and your company.