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Does a £35k dividend clear a £35k overdrawn DLA

Firstly,many apologies for posting this question as i know similar if not the same question has been asked before. I have quickly searched any answers to find the answer but have drawn a blank.

DLA overdrawn by £35k at the year end. It is now 8 months since the year end. We now know that there was £32000 of undistributed profit at the year end. If i clear the £35k by £30000 final divi plus £5k interim divi now does that remove the need to pay S455 tax? He will have taken out probably £35k+ since the year end.

I know in the past, i have seen people argue that Loan 1 of £35k is cleared by the dividend and that the amount withdrawn since the year end is a separate loan. Do the Revenue accept that?

Alternatively, what about backdating a £32k dividend to a date say 14 days after the year end? I must admit that doesn't sit comfortably with me but does anybody adopt this approach. I guess the Revenue can never prove the date a minute was passed crediting the dividend to the DLA?

Any help greatly appreciated and once again apologies for posting a question that has almost without doubt been covered before.


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25th May 2012 18:09

Rule in Clayton's Case

A £35k divi dated today would clear the opening balance, even though there have been subsequent withdrawals.  I would not recommend backdating any dividends....

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25th May 2012 19:52

Thanks for that taxhound - greatly appreciated.

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28th May 2012 11:09


You can set the repayment against any debt you choose - see the rule in Re Clayton's Case (1873)



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29th May 2012 14:49

is this how the Clayton rule works?

If the director repeatedly takes out and then repays the same amount, doesn't that lead to a nonsensical situation? For example, DLA £35k dr at y/e, one month later director takes out another £30k, then at month 2 pays back in £30k, month 3 takes out £30k, month 4 pays back in £30k. If I understand correctly, the Clayton rule is saying that this can be regarded as repaying £60k which more than covers the £35k dr at the earlier y/e. I'd really like this treatment to be correct but it just seems the sort of situation that HMRC would want to attack.

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29th May 2012 15:03

@ Red Leader

Yes, this has already been suggested as a means of avoiding a s455 charge, using an even simpler solution:

Example - £100k overdrawn loan at end of year. 8 months later, draw out a further £100k and repay it a few days later. It will be treated as repayment of the earlier loan. Because this is the reverse of normal 'bed & breakfasting', HMRC do not specifically comment on it. However, CTM61615 does mention Ramsay and I would expect that to be applied in the example I give.

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By petew
01st Jun 2012 12:05

Am I missing something?

So you are saying that we should never be paying s455?

Whatever the o/d balance is we can just borrow that amount again within 9 months and repay it a few days later to avoid the tax?

As Red Leader said this sounds too easy for HMRC to attack?

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01st Jun 2012 12:49


Not missing, just misunderstanding..... have a look at HMRC Manuals EIM26260 and 26261 where HMRC comment on the rule in Claytons case and the application.  The original question posed sits comfortably within those extracts.  The original question posed discussies the situation where there is a genuine repayment other than from the post year end drawings.


The difficulty I have with the taking of short term loans is the issue of bed & breakfasting (often known as churning) which HMRC comment on at EM8565.  In such circumstances HMRC will challege a claim for relief under sec 458 if there is "viewed realistically no repayment of the loan was made"

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