Query regarding s455 tax on directors' loan account

Query regarding s455 tax on directors' loan...

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I have taken over the accounts of a limited company, from their previous accountant whose work they were not happy with.  The client has asked me to review the 2010-11 corporation tax return before the previous accountant submits it (my engagement starts with the 2011-12 accounting period; the previous accountant has finalised the returns for 2010-11).

A couple of points have sprung to mind when reviewing the corporation tax return. 

- The directors loan balance was £13k at the start of the return period.

- Loans were made during the year totalling £14k. 

- The balance at the end of the return period was therefore £27k.

- The client has paid £3k into their business bank account to pay off some of the loan, 5 months after the year end.

- S455 tax has been charged at 25% on the full £27k, with no relief for amounts repaid.  Total tax charge = £6,750.

1) I would have expected to see the charge on the increase in the year of £14k, not the entire balance.  I do not have the previous year's tax return in my possession, but presuming that the original £13k was included in last year's CT return (and s455 tax charged at 25%), this year's tax charge would only be on the increase in the year. I would expect tax of £3500 to be due.

2) The £3000 repayment made within 9 months of the end of the return period should be shown in section 2 of CT600A and means that £750 of relief is due.

The total tax due would be £3500 - £750 = £2750.

This is the first time I have had to deal with a tax charge on a directors loan account (most of my clients are small businesses whose directors loan account balances are in credit at the end of the financial year).  I would appreciate any thoughts as to whether I am missing anything obvious in the above analysis!

Finally, I have one further question which is hopefully a very obvious answer.  When the client repays more of the loan in a future period, where does this go on CT600A to calculate relief due?  Section 1 states that credit balances arising on repayment of loans made in an earlier period must be excluded, Section 2 is only for relief on amounts repaid on loans made during the return period, and section 3 is not normally applicable.  I would have thought repayment of a loan made during an earlier return period would be very common transaction, but there doesn't seem to be an obvious place for it on the CT600A...

Replies (19)

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By User deleted
07th Dec 2011 22:03

Loans repaid from earlier periods ...

... have to be claimed seperately (not on CT600), and cannot be claimed until the due date of the CT for the current period (there was a recent thread on this)

You are right in principal on the charge being on the new loan only, but you need to get the full details as it may be it wasn't paid last year.

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By petersaxton
07th Dec 2011 22:14

HMRC are not very helpful

The charge should be the increase less repayments within 9 months but you should check what happened in the previous year. You should ensure that you have all the relevant transactions before saying there is a repayment.

HMRC expect you to write a letter after the date the repayment is due asking for the repayment of the charge.

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By Paul Soper
07th Dec 2011 23:44

s455

Even if the loans made in the earlier period were not properly accounted for then CT600A only applies to the credit provided in the AP in question.  The liability should be accounted for in Part 1, relief for the repayment in part 2 and the net accounted for for this AP.

This leaves the issue of the previous years return and if s455 was not properly accounted for then that return should be amended if within time.  Assuming a 31 March year end theer is still time to amend 31.3.2010 as well as the 31.3.2011 return which the previous accountants will still submit.  If not amended then HMRC should be notified as failure to notify is deemed negligence and exposes the client to discovery assessments at any time in following 20 years.  This will lead to a discovery assessment.

It should be made clear to the previous firm that your client looks to them for payment of any penalties, interest and surcharge arising through their failure to properly return the sums involved, and HMRC made aware that your client attributes this to their former adviser to try to keep his or her nose clean.

A work-round for repayments under s455 is alleged to be putting in a negative figure in the liability box in the CT600, not the CT600A.  According to the legislation a claim for recovery must be made in the return and, as observed, there is nowhere obvious in the return to claim the relief.  Naturally a letter setting out the conditions of the claim would be submitted as well.

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By petersaxton
08th Dec 2011 00:09

Reference?

 

“According to the legislation a claim for recovery must be made in the return”

Have you got a reference for this?

It doesn’t seem practical and I can see no reference to recovery needing to be made on the return.

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By Paul Soper
08th Dec 2011 00:21

Sorry

just checked the legislation - before CTA2010 the original legislation required the claim to be made in the return, the legislation now requires a claim within 4 years of the end of the AP of repayment.  Which applies here depends on the year end which isn't given.

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By sparkler
08th Dec 2011 10:11

Thank you everyone for the helpful and informative replies. 

I feel confident now to report back to my client with matters that they may wish to bring to their previous accountant's attention before he submits the return.

The accounting period end for 2010-11 is 30 April 2011.  So there is still time to amend 30/4/10 (as long as they do it before 30 April 2012) and correctly submit 30/4/11.

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By sparkler
14th Dec 2011 14:38

Further to the previous comments, I have now delved deeper and it appears that no directors loan was shown on the 2009-10 accounts because the accountants believed that the £13k loan made during the previous return period was going to be paid off within 9 months of the year end (according to information given to them by the directors 3 months after the year end).  The loan was in fact not paid off within 9 months of the year end, and was indeed increased in the following year.

 

The previous accountant does not wish to submit an amendment to the prior year tax return as they believe it was correct to include a zero directors loan balance based on the facts at the time, and are confident that it should be included in the 2010-11 corporation tax return, along with the increase in loan made during 2010-11.

 

Does this seem reasonable, or should the client be pushing for the amendment, or at the least a notification to HMRC of the facts surrounding the directors loan and its treatment on the two corporation tax returns?

 

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By Paul Soper
14th Dec 2011 15:02

What???

"no directors loan was shown on the 2009-10 accounts because the accountants believed that the £13k loan made during the previous return period was going to be paid off within 9 months of the year end" - how can their year end accounts show a true and fair view as the loan was clearly, by their own admission still in existence at the year end - the accounts obviously have no connection with reality at all.  Just because you think something might happen after the year is no reason for pretending that it did during the AP thus avoiding the need to complete CT600A.  How do they explain this away???

If the accounts have been altered to include fictional entries isn't this fraud and shouldn't this be reported as such?

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By User deleted
14th Dec 2011 15:06

Do you mean accounts ...

... or CT600

If there was a loan it is a matter of fact and should be on the accounts.

With regard to the CT600 it should go on as a loan at the year end and there is space to show when it was repaid and the reduction of s455 tax to nil.

They should have either shown it on the CT600 with tax due and then amended the return when the loan was repaid, or, held the CT600 until the 9 month point, established the facts and then submitted it showing the loan repaid or not as the case may be.

To not show it at all is incorrect, IMVHO.

 

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By sparkler
14th Dec 2011 15:24

Apologies that was a typo on my part - no directors loan was shown on the corporation tax return, as opposed to the accounts.  I have not seen the 2009-10 accounts, but I assume that the loan at the year end date was included, correctly, as a debtor balance.  Sorry for the confusion.

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By User deleted
15th Dec 2011 15:46

My comment stands

It should be on the CT600 and shown as paid within the nine months or not. and should not be left off completely.

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Replying to shaun king:
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By Paul Soper
16th Dec 2011 16:23

+1 on that

I agree with the old greying accountant as another old greying accountant -

The loan should be shown on form CT600A part 1 and relief for the repayment on form CT600A part 2.  If the loan was not repaid in full there would then be a liability to transfer to the return.

At a seminar the other day one of the delegates mentioned that where a loan had been repaid Taxcalc did not generate a form CT600A.  The return without CT600A is not a complete return and could be rejected by HMRC with penalties etc on resubmission, and if there is a liability as the question suggests, even worse.

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By User deleted
16th Dec 2011 16:31

Thanks Paul

I have been to many a seminar presented by you, glad something has sunk in - :o)

Or more importantly sunk in and not drained out at the bottom!

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By zarathustra
16th Dec 2011 16:33

Mountains and Molehills

I would just claim back the tax on the £3K and leave it at that. The correct amount of s455 has been paid overall, but not necessarily at the right time.

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By chatman
16th Dec 2011 16:50

Is there a tax programme that does this?

It would be great if there was a tax programme that did all this for you. I would have thought it would be quite basic.

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By petersaxton
16th Dec 2011 17:11

Digita Corporation Tax

The user enters the loans and repayments and the program does the rest.

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By chatman
16th Dec 2011 17:14

Digita

What does it do about the reclaim?

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By petersaxton
16th Dec 2011 17:18

Digita

If it's within 9 months it shows it on the CT600A.

If it's after the 9 months you have to right a letter anyway and it doesn't do it automatically.

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By chatman
16th Dec 2011 20:06

Digita.

I think they all do that.  It would be good if there was a tax programme that did it all for you

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