In our weekly Q&A, Croner Taxwise tax adviser Amaira Badat examines the tax liability when a company director draws down a director’s loan and then looks to extend borrowing after a dividend payout
My client is a director and shareholder of his own limited company. He draws down on his director’s loan account throughout the year. At the year ending 31 December 2020 he has an outstanding balance of £25,000.
The company will be declaring a dividend of £30,000 in March 2021, of which £25,000 will be used to repay the loan account by putting it into credit. However, my client has continued to draw down more loans since then, and this will be approximately a further £20,000 by March. Will he be caught by the bed and breakfasting rules?
The short answer is no, the bed and breakfasting rules will not apply in your specific situation because s464C(6) Corporation Tax Act 2010 (CTA 2010) would kick in, as the dividend is chargeable to income tax.
Section 464C(6) does not apply in relation to a repayment which gives rise to a charge to income tax on the participator or associate by reference to whom the loan, advance or benefit was a chargeable payment.
As the loan will be repaid by this dividend within nine months, there will be no tax charge under s455 CTA 2010. The company will still need to report the balance outstanding at the year end, and its subsequent repayment, on HMRC form CT600A.
As a quick overview, tax is payable at 32.5% under s455 CTA 2010 if there is a balance outstanding to the company at the year end, and it is not repaid to the company within nine months of the year end. There is no de minimis to the amount outstanding to trigger a s455 charge (unlike the £10,000 needed to trigger a beneficial loan p11d requirement).
If a loan is repaid more than nine months after the year end, the 32.5% still needs to be paid. However. it can be claimed back from HMRC nine months and one day after the end of the accounting period in which it is repaid. This can be done by amending the CT600A (if in time to do so) or submitting an L2P form.
There are also some anti-avoidance provisions in place, to stop individuals repaying loans and then immediately taking out new loans. These are commonly known as the bed and breakfasting rules and are legislated for at s464C CTA 2010.
There are two restrictions:
This applies where a new loan is taken out within 30 days of the repayment of an earlier loan and the repayments or new loans are more than £5,000.
In any 30-day period starting 30 days before the year end and ending nine months and 30 days after the relevant year end, you need to look at all loans and all repayments. Starting with the earliest 30-day period you should match repayments to loans in accordance with S464C(1) CTA 2010.
This applies where arrangements are in place for a loan to be made at the time of repayment, and the original loan amount is more than £15,000.
There is guidance on the meaning of arrangement at CTM61635.
These rules are very mechanical in application, and care should be taken to refer to the legislation when applying these.
About the author
Amaira Badat is a tax adviser at Croner Taxwise