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Client's Company can't afford to pay S455 charge

Client's Company can't afford to pay S455 charge

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In spite of repeated warnings a client kept on drawing the money out of his limited company; net result is a debit balance on his Directors Loan Account at year end of 25,000 which he has advised he cannot repay into the Company before the 9 month deadline after year. Allowable dividends have alreasdy been declared up to the total of available "after tax" profit so no further dividends can be declared to clear the loan.

The Corporation Tax bill for the year is also approx 25,000 which the Company cannot currently pay either. So basically if he had been able to repay the Directors Loan balance the Company would have had the money to pay the Corporation Tax. However now he is faced with the Corporation Tax bill of 25,000 plus S455 of 32.5% on the DLA balance of 25,000 ie 8125.

The penalty regime for late payment of Corporation Tax is fairly gentle, generally just requiring interest to be paid at 3% per annum until HMRC appoint the heavy boys to try to collect.

Just wondering what the penalty regime, if any, is for the S455 charge.

I know if he repays the DLA in due course the S455 is refundable but the refunds are only repayable by HMRC a long time after the DLA is repaid.

The client is past retirement age and drawing state pension. I suppose the Company could write off the DLA before the 9 months is up to avoid the S455 although he has never had a PAYE scheme set up. Do you have to have a PAYE scheme to be able to do this? Given his age would NI be payable by employee or employer on the amount of DLA written off or would it just be PAYE because of his age?

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By mrme89
25th Jul 2017 09:59

Will the client ever be able to repay the £25k?

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By lionofludesch
25th Jul 2017 10:14

So the company can afford to lend money to the director but not to "lend" money to HMRC for the s455 charge?

How about the director gets real about how much his company is making? His company seems to be making a decent wedge - around £125000 if we extrapolate from the CT payable - but that's still not enough for him, apparently. He may be surprised to learn that many entrepreneurs struggle along on less.

As I get older, I have less and less patience with greed. If he kills the goose that's laid his golden egg, tough. As a pensioner, he should have learned the ways of the world by now.

Harsh? Yes. Life is harsh.

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Replying to lionofludesch:
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By MissAccounting
25th Jul 2017 12:29

lionofludesch wrote:

So the company can afford to lend money to the director but not to "lend" money to HMRC for the s455 charge?

How about the director gets real about how much his company is making? His company seems to be making a decent wedge - around £125000 if we extrapolate from the CT payable - but that's still not enough for him, apparently. He may be surprised to learn that many entrepreneurs struggle along on less.

As I get older, I have less and less patience with greed. If he kills the goose that's laid his golden egg, tough. As a pensioner, he should have learned the ways of the world by now.

Harsh? Yes. Life is harsh.

Harsh but fair.

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By ms998
25th Jul 2017 10:53

When you write off the s455 charge is it not treated as a dividend if the person is a shareholder in a close company?

In answer to your question s455 charge is just part of Corporation Tax and the normal rules apply, eg interest etc. What you may have is bailiffs on the door wanting their tax paid.

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Replying to ms998:
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By lionofludesch
25th Jul 2017 11:07

ms998 wrote:

When you write off the s455 charge is it not treated as a dividend if the person is a shareholder in a close company?

It's a distribution, yes. For practical purposes, the same as a dividend. There are no PAYE implications.

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Replying to lionofludesch:
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By ms998
25th Jul 2017 11:34

I noticed by typo - the company would be writing off the loan, not the s455 charge (silly me!)

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By soundadvice
25th Jul 2017 11:38

I agree with you Lion .. the client's behaviour irritates the hell out of me.

Knowing that someone is earning that much and is just stripping the Company bare makes it difficult to be sympathetic in any way.

I'm pretty sure that once I have prepared this set of accounts, which won't be complicated then I will disengage.

Thanks for clarifying that the S455 will be treated in the same way as Corporation Tax in terms of late payment penalties (ie interest at 3% till the bailiff comes along).

Bit confused by the write off treatment. I believe it is treated as a distribution (dividend) for income tax and earnings for NI. As he is over 66 now does this mean at least there will be no national insurance due .. either employer or employee NI?

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Replying to soundadvice:
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By lionofludesch
25th Jul 2017 12:01

soundadvice wrote:
As he is over 66 now does this mean at least there will be no national insurance due .. either employer or employee NI?

There's no NI whatever his age.

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Replying to lionofludesch:
By Ruddles
25th Jul 2017 14:57

I, of course, concur. That doesn't mean that HMRC wouldn't try to grab NI.

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Replying to Ruddles:
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By bumpdinkwhallop
26th Jul 2017 11:49

You have changed your tune

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Replying to bumpdinkwhallop:
By Ruddles
26th Jul 2017 23:05

No I haven't. You're just making a fool of yourself - again.

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By mrme89
25th Jul 2017 11:45

If written off in capacity as shareholder, there are no NI implications.

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Replying to mrme89:
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By bumpdinkwhallop
26th Jul 2017 11:55

I believe so too but struggling to find any cases where the judges comments make this so, do you have any links you can post for me to look at.

I found this one FFT Stewart Fraser Ltd v HMRC (2011)

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Replying to bumpdinkwhallop:
By mrme89
26th Jul 2017 12:02
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By bernard michael
25th Jul 2017 14:35

Will he have the money to pay his personal tax??

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By soundadvice
25th Jul 2017 17:48

Not sure how he will handle the personal side of things.

He has been chasing his tail with taxes owed since I took him on 2 years ago and all attempts to try to explain to him how Directors Accounts work and how he needs to understand the separate legal entities (ie himself and his company) and how they should interact has proved fairly fruitless. Hence my inclination to disengage sooner rather than later.

He speaks to HMRC pretty regularly to agree payment plans on both personal and company taxes and he does generally end up paying his full dues to HMRC but he could certainly save himself time, aggravation and money by just doing things the right way in the first place.

I asked him a couple of days ago what has actually happened to all the money he has drawn out so shall be interested to hear his response.

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Replying to soundadvice:
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By lionofludesch
25th Jul 2017 17:53

soundadvice wrote:

I asked him a couple of days ago what has actually happened to all the money he has drawn out so shall be interested to hear his response.

Maybe his other accountant is a turf accountant.

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By cfield
26th Jul 2017 11:19

Writing off the debt would be the worst thing you could do as not only would it be taxed as a distribution but the company would not get a CT deduction for the write-off as he is a connected party (CTA 2009 s321A).

Can't you work out an interim dividend based on current year profits to date? That would help to get the s455 tax bill down. There is also his current year salary to come off the year end debt.

What about the BIK? Did you do a P11D for him and/or work out 3% interest? Of course, that means updating the loan a/c to 5 April. All extra work. All extra fees. He won't like it, but that's what happens when you play fast and loose with your company's funds.

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Replying to cfield:
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By lionofludesch
26th Jul 2017 12:00

cfield wrote:

Writing off the debt would be the worst thing you could do as not only would it be taxed as a distribution but the company would not get a CT deduction for the write-off as he is a connected party (CTA 2009 s321A).

Can't you work out an interim dividend based on current year profits to date? That would help to get the s455 tax bill down. There is also his current year salary to come off the year end debt.

I'm not sure, in practical terms, how that would be any different.

Write off the loan, no CT deduction. Taxed as a distribution.

Declare a dividend, no CT deduction. Taxed as a distribution.

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Replying to lionofludesch:
By cfield
26th Jul 2017 12:31

It might make a difference in as much as he could make sure he pays just 7.5% on judiciously planned dividends rather than 32.5% on a lump sum all in one go.

Also, if he closes the company and gets CGT treatment, he could offset the loan against the final distribution, which might turn out to be more tax efficient, depending on the sums involved. He has his annual CGT exemption to play with here.

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Replying to cfield:
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By lionofludesch
26th Jul 2017 12:52

It may, it may not.

It would be pure speculation.

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Replying to cfield:
By Ruddles
28th Jul 2017 11:44

Or judiciously planned write-offs. The point is that, from a tax viewpoint, there is no difference between a loan release and a dividend.

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Replying to Ruddles:
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By lionofludesch
28th Jul 2017 12:05

Indeed. And the advantage with loans is they don't have to be proportional to the shareholdings.

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Replying to lionofludesch:
By Ruddles
28th Jul 2017 12:08

Although if the company directors were to relieve you of your obligation to repay your £100k debt to the company, and not release mine, I may be a little miffed ;¬)

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Replying to Ruddles:
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By lionofludesch
28th Jul 2017 12:21

On the other hand, if you were on £100k a year and your lovely wife on £80k, a write off of your wife's loan of £20k, rather than yours, might not be looked upon with such disfavour.

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By Justin Bryant
26th Jul 2017 12:19

Wasn't there a long debate on this here about 2 years ago re what a write off means and whether you could arbitrage between that & a formal release etc.?
https://www.gov.uk/government/publications/corporation-tax-reclaim-tax-p...

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Replying to Justin Bryant:
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By bumpdinkwhallop
26th Jul 2017 12:25

You wouldn't need that L2P if its written off within 9 months for the year end in which the loan was taken

I normally send the L2P as a pdf along with the tax return relating to the year the return is written off/repaid

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By soundadvice
26th Jul 2017 13:33

Thank you for the feedback

He has backed himself into a bit of a hole unfortunately.

He effectively stopped trading a few months ago not long after his last year end and all potential "after tax" profits have already been declared as dividends.

His Directors Account debit balance now (a few months after year end) is almost the same as the Company's Corporation Tax liability.

I think probably his choices are either to accept the 32.5% S455 which I am sure he will take months to pay to HMRC anyway and then hope to get it refunded at some point down the line or to write off the outstanding DLA balance as a distribution and pay the income tax at 32.5% on the distribution (he will be a higher rate taxpayer).

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All Paul Accountants in Leeds
By paulinleeds
26th Jul 2017 21:52

I do not think that HMRC would be very sympathetic to not getting the CT paid (normal or s455 tax) if the company has a large overdrawn director's loan.

You cannot just write off a loan, especially when it is not really a bad debt, unless it is in the best interest of the company, i.e. not to benefit the director. To write off the debt the company must show that it has done all it can to recover the debt from the director e.g taken him to court.

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Replying to paulinleeds:
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By lionofludesch
26th Jul 2017 22:29

Why ?

So far as HMRC are concerned, they get the same tax deal as if it were a dividend. No CT relief, treated as a dividend in the recipient's hands.

Are we going to see dividends banned ?

I think not.

You're on the wrong track here.

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By HeavyMetalMike
28th Jul 2017 10:22

If this Q&A is still going this morning..........

Surely writing off the DLA will just mean -ve reserves? and then knock on effect to the current year - so another DLA??

But more importantly, as the adviser you would should warn him about liquidators and breach of Companies Act in writing. And that if liquidators are ever chasing HMRC debts then the first port of call will be the directors. I failed to warn clients at the time of preparing accounts that this might happen (well before any talk of liquidators), and that is a reason that I may well be getting sued.

I had a case a few years ago of this nature. I referred him to a liquidator/insolvency firm whom I thought was going to do client a favour. Not sure of details as to how they would deal with it but it was on the basis that they'd tell HMRC that "they'd done all they could, and here's 10K instead of the 40K in VAT and CT".......But the liquidators changed their minds, (arguably did their job), went after the three directors - the father was 2 weeks off retirement, debt collectors, heavy handed approach, collected 40K from the directors, and as good as wrote themselves a cheque for much of it.....

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Replying to HeavyMetalMike:
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By lionofludesch
28th Jul 2017 11:30

HeavyMetalMike wrote:

If this Q&A is still going this morning..........

Surely writing off the DLA will just mean -ve reserves? and then knock on effect to the current year - so another DLA??

Well, I suppose the company could have £2 zillion in fixed assets. So not necessarily. Though it seems unlikely.

Not enough information to say for sure, is there?

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By bernard michael
28th Jul 2017 10:34

The job of the liquidators is to realise the assets of the company for the benefit of the creditors as a body not to look after the directors.
Any overdrawn DLA will be collected where possible

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Replying to bernard michael:
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By lionofludesch
28th Jul 2017 11:28

Indeed - and if you want a cautionary tale, a client of mine wouldn't listen to the dangers of drawing out sums on his DLA. "Oh, no, we'll fix it when you do the accounts," he used to say.

One day his major customer went bust, dragging the client's company into the black hole of liquidation. The DLA stood at around 18 months drawings or £42000, which the liquidator asked for.

Client ended up with a new mortgage on his house of £42000. On top of the mortgage he already had.

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Replying to lionofludesch:
By mrme89
28th Jul 2017 11:51

Should have made an offer to the liquidator. They'll usually settle for less if you can make a lump sum payment.

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By Portia Nina Levin
28th Jul 2017 12:06

If the company isn't solvent, and the director has drawn money out of the company as a loan and that loan gets written off with the effect that the company cannot pay its creditors, and a liquidator is appointed, there is a risk of the director being jailed.

CA 2006, s 993, IA 1986, s 206 and s 207, Fraud Act 2006, s 4 and s 12 (not to mention the 1968 Theft Act) are all potentially in point, and are all potentially imprisonable offences. Just a thought.

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Replying to Portia Nina Levin:
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By Justin Bryant
28th Jul 2017 12:34

Without wanting to plough thorough all the above posts, surely the loan still exists if the company just writes it off (as without more, that's just an accounting exercise?) I recall this point has been debated here at length before.

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Replying to Justin Bryant:
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By Portia Nina Levin
28th Jul 2017 12:46

Well, within that debate, I'd be in the camp that thinks that the words "written off" should be interpreted in the context of the words "released or" that precedes them, and that impairing such a debt is not sufficient to bring ITTOIA 2005, s 415 and CTA 2009, s 458 in to play.

If the debt is to remain, and the s 455 charge to not be mitigated, what then is the point from a tax perspective, of "writing it off".

If the company does not believe that it will recover the debt, then, irrespective, of any tax consequences, it should be impaired.

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Replying to Portia Nina Levin:
By Ruddles
28th Jul 2017 12:50

Agreed - are we set to have another 100 posts debating with John and Justin on the meaning of "write off"?

And heaven help us if Basil gets involved.

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Replying to Ruddles:
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By Justin Bryant
28th Jul 2017 12:54

Well done for remembering that debate (who could forget it!) If you could add a link to it so I could remind myself of what we were all so keen to waste our collective time on I would be grateful.

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Replying to Justin Bryant:
By Ruddles
28th Jul 2017 13:00
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Replying to Ruddles:
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By Justin Bryant
28th Jul 2017 14:03

That's it! Many thanks. The link below (posted by me within your above link) is potentially of interest in this context if the company is liquidated in due course.
https://www.accountingweb.co.uk/any-answers/llp-in-liquidation

See here too:
https://www.accountingweb.co.uk/any-answers/will-tax-rate-of-s455-increase

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Replying to Justin Bryant:
By Ruddles
28th Jul 2017 14:35

Reluctant as I am to spend another afternoon arguing the toss (and I won't, this is my only comment on the matter):

A liquidator is sitting with a company holding a debt due from the participator. He has 3 basic choices:

Pursue the debt

Write off/waive/release - whatever your preferred terminology

Do nothing (for commercial reasons or otherwise) and have the company dissolved.

In the third case, I would say (and would expect HMRC to argue likewise) that in dissolving the company without pursuing the debt the liquidator has ipso facto released the debtor from his obligation.

But if the liquidator has been unable to recover the debt, and there is s455 recoverable (or indeed payable), I find it inconceivable that the liquidator would not then release the debt in order to at least recover the s455 charge (or to remove the liability to pay).

So the dissolution of a liquidated insolvent company without a formal release of participator debt is in my view so unlikely to happen that it doesn't really merit serious discussion.

Over and out.

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Replying to Ruddles:
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By Justin Bryant
17th Aug 2017 12:56

Well, I have never see that happen in practice (most liquidators would not know about the intricacies of formal deeds of loan waiver in my experience) and this Taxation article on the matter does not necessarily have a formal waiver by the liquidator.
https://www.taxation.co.uk/Articles/2017/08/15/336830/readers-forum-wind...

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Replying to Justin Bryant:
By Ruddles
17th Aug 2017 14:25

Well, I have seen that happen in practice - many times. Perhaps I just deal with more competent liquidators.

As for the link to the article, would you please desist from linking to articles/case law that are of no relevance to the discussion in hand.

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Replying to Ruddles:
By mrme89
17th Aug 2017 15:21

It's difficult to change the habit of a lifetime.

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By tim hervey
29th Jul 2017 16:13

From CT600 Guide: "The term 'release' refers to a formal procedure that normally takes place under seal for a consideration, whereas 'write off' is a wider term that does not necessarily require formal arrangements and could include acceptance by the company that the loan will not be recovered and has given up attempts to recover it."
Also, loan is reportable on P11D and benefit arises if interest is below that at official rate and Class 1A NICs due on value of benefit. Any loan written off must be reported and Class 1A NICs (but not PAYE) paid on the value of the benefit.

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By Gone Sailing
29th May 2019 14:58

Found this to be really helpful ... thankfully a very rare scenario for me ... so if anyone is still connected or interested .......

Why is "paying a salary" (DR P&L, CR DLA) not discussed, ie. in the 9 months following an o/d DLA?

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Replying to Gone Sailing:
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By lionofludesch
29th May 2019 15:12

Probably because it's unlikely to be better than a dividend.

Could be, though, depending on the size of the loan, taxpayer's personal tax position, shareholdings and other factors I've not thought of.

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Replying to lionofludesch:
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By Gone Sailing
29th May 2019 15:29

Absence of reserves?

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