Reclaiming section 455 tax

In family and personal companies, directors may lend money to the company and they may also borrow from the company. Where the company director borrows from the company, a record of the amount borrowed is kept in the form of a `director’s loan account’. The loan balance may be cleared by crediting dividends or salary to the account or by the director repaying money borrowed back to the company.

If the director’s loan account is not cleared at the end of the accounting period and the loan has not been repaid within nine months of the year end, the company must pay an amount of corporation tax equal to 25% of the loan balance outstanding at this point over to HMRC. This is known as section 455 tax. If the loan is repaid, this tax can be reclaimed.

Reclaiming section 455 tax

The good news is that the section 455 tax can be reclaimed once the loan has been repaid. The bad news is that the repayment cannot be claimed until nine months and one day after the end of the accounting period in which the loan was repaid. This is the normal corporation tax payment date for the accounting period in which the loan was repaid.

Example

James is a director of his family company. The company is a close company. During the period to 31 March 2013 James had a loan from the company of £30,000. The loan was not repaid within nine months of the end of the accounting period and s. 455 tax of £7,500 (25% of £30,000) was paid to HMRC along with the corporation tax for the year to 31 March 2013 on 1 January 2014.

In August 2014 the loan was repaid in full. As the repayment was made in the year to 31 March 2015, the s. 455 tax cannot be reclaimed until 1 January 2016 – nine months and 1 day after the end of the accounting period in which the loan was repaid.

Reclaiming the tax

Form LP2 (which is available to download from the GOV.UK) website can be used to reclaim the tax once the repayment date is reached. The form is designed to be completed on screen and then printed out and sent by post. Currently, it cannot be submitted electronically.

If the tax is being reclaimed is within two years of the end of the accounting period in which the loan was taken out, the repayment can be made on form CT600A when filing the corporation tax return for that accounting period.

HMRC are notoriously slow at processing s. 455 repayments. At the time of writing they were quoting eight weeks … but don’t hold your breath!

If you need further advice on reclaiming section 455 tax or information on any other tax related matters please get in touch with us at Inform.

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PPR Flipping- principle primary residence

Entrepreneurs' relief on the disposal of shares in a personal company