Just for complete clarity this is a CTA exam question, not regarding an actual client!
Just revising for the One Man Band paper and looking at the answer to last November's exam. The first question relates to an outstanding loan to a director-participator, with the usual s455 implications and options for clearing it. The calculations for clearing via a bonus I'm OK with, you have to gross up for tax and NI to make sure that the net left over is enough to clear the loan, but they then do the same for the dividend option which seems wrong to me.
So situation is a loan outstanding of £22,500, the answer suggests declaring a Dividend of £30,000 which will be £22,500 net off 25% Income Tax (£30k grossed up, multiplied by 32.5% higher rate dividend rate, less 10% credit), I agree that based on a £30k dividend the director will end up with £22.5k after tax. What I can't understand is why they are suggesting a £30k dividend at all, surely in the company accounts you see the gross amount of the dividend posted to the DLA and that clears the balance. This dividend will then be taxable in the hands of the director, but surely that shouldn't matter in terms of the companies accounts and tax position, as the dividend is not subject to PAYE it isn't having an amount deducted by the company, it is payable via the directors Self-Assessment. So I'm thinking that the dividend only needs to be £22.5k - i.e. the actual amount of the loan outstanding.
Am I going mad, or missing something fundamental/specific to s455 rules?