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Directors loan account; repayments after year end

can dividends voted after a financial year end count as repayments of a directors loan account

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I have a client with substantial directors loan at 31 March 2019. The company has voted dividends after the financial year end based on profits generated since 31 March 2019. The question is, can these be used as 'repayment' of the DL at 31.3.2019 (the director is also a shareholder) for the purposes of the Company s455 tax charge on overdrawn loan accounts that is levied on any DL still outstanding by 31 December 2019, bearing in mind that the director has also continued to draw out funds on the loan account since 31.3.2019, therefore increasing the overdrawn DL.

I understand there is a 30 day rule but I'm not sure whether this is relevant here.

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Psycho
By Wilson Philips
05th Aug 2019 20:34

Crediting the loan account with the dividend is fine - the “30-day rule” to which you refer is irrelevant. Someone will no doubt be along to ask if you are sure that there were sufficient reserves.

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Replying to Wilson Philips:
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By blackdust567
05th Aug 2019 20:57

Thanks for this, noted re the sufficient reserves rule so I will be sure to check that also!

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Replying to Wilson Philips:
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By Accountant A
05th Aug 2019 21:39

Wilson Philips wrote:

Crediting the loan account with the dividend is fine - the “30-day rule” to which you refer is irrelevant.

I read "can these be used as 'repayment' of the DL at 31.3.2019" as meaning backdating the dividend to that date. Shirley that's not OK??

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Replying to Accountant A:
Psycho
By Wilson Philips
05th Aug 2019 22:03

That’s not OK, and to be fair that is also how I initially read it. But second time around I read it as repayment of the amount which was outstanding at that date, without the need to repay the subsequently increased balance.

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Replying to Accountant A:
RLI
By lionofludesch
05th Aug 2019 22:41

Accountant A wrote:

I read "can these be used as 'repayment' of the DL at 31.3.2019" as meaning backdating the dividend to that date. Shirley that's not OK??

You read something that wasn't written.

"Can an April-Dec 2019 dividend cover a 31 March 2019 loan balance?" was the question posed.

Answer - Yes.

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Replying to lionofludesch:
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By Accountant A
06th Aug 2019 01:15

lionofludesch wrote:

"Can an April-Dec 2019 dividend cover a 31 March 2019 loan balance?" was the question posed.

Well that's not what it says so you might want to get down to Specsavers - or give the hallucinogenic drugs a miss when posting.

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Replying to Accountant A:
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By atleastisoundknowledgable...
06th Aug 2019 08:29

Accountant A wrote:

lionofludesch wrote:

"Can an April-Dec 2019 dividend cover a 31 March 2019 loan balance?" was the question posed.

Well that's not what it says so you might want to get down to Specsavers - or give the hallucinogenic drugs a miss when posting.

“The company has voted dividends after the financial year end based on profits generated since 31 March 2019. The question is, can these be used as 'repayment' of the DL at 31.3.2019”

How is that not what it says?
“Can a dividend declared post YE clear a YE DLA”. Are you trying to say that you’ve never come across this? This is exactly how 99.9999%* of DLA’s I’ve seen are cleared.

I’d probably note in the board minutes that the dividend was to be used to clear said DLA. Maybe if I remember.

(* give or take)

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Replying to Accountant A:
RLI
By lionofludesch
06th Aug 2019 10:07

Accountant A wrote:

lionofludesch wrote:

"Can an April-Dec 2019 dividend cover a 31 March 2019 loan balance?" was the question posed.

Well that's not what it says so you might want to get down to Specsavers - or give the hallucinogenic drugs a miss when posting.

It says so right here.

"I have a client with substantial directors loan at 31 March 2019. The company has voted dividends after the financial year end based on profits generated since 31 March 2019. The question is, can these be used as 'repayment' of the DL at 31.3.2019 (the director is also a shareholder)....."

Just take the time to read the question.

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Replying to lionofludesch:
Psycho
By Wilson Philips
06th Aug 2019 09:02

I do believe that was the question asked, having mis-read it the first time round. The important word is "at" rather than "on" (31.3.2019).

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Replying to Wilson Philips:
RLI
By lionofludesch
06th Aug 2019 10:34

Wilson Philips wrote:

I do believe that was the question asked, having mis-read it the first time round. The important word is "at" rather than "on" (31.3.2019).

Yes - it says very clearly that the dividends were declared after the year end. There's no implication of back dating.

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Replying to lionofludesch:
Psycho
By Wilson Philips
06th Aug 2019 11:40

Agreed, although it wouldn't have been the first time that I'd seen a client trying to book a dividend declared on one date against the loan account with an effective earlier date (to avoid BIK issues ). "Trying" being the operative word in more senses than one!

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Replying to Accountant A:
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By blackdust567
06th Aug 2019 10:28

thanks - no I didn't mean backdating dividends, we will have dividends declared in the current financial year which director wants to use to offset DL for CT s455 purposes

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By whitevanman
07th Aug 2019 11:38

Forgive my confusion but what is the date to which the company draws up its accounts? I think we all assume it is 31 March but as that is (also) the Financial Year end (for all) it could be a little confusing.
I raise the point because, for S455 purposes what is important is that the loan is repaid within 9 months of the end of the company's accounting year in which the loan is made (if a charge is to be avoided).
One other point, assuming the year end is 31 March, a dividend based on later profits will be an interim dividend for the year (to 31 March 2020). It is not voted and is only available when "paid". I will not go through the circular discussion but HMRC accept that payment can be made by crediting it to the DLA. So, it is important that entries are made in the company records evidencing the crediting on a date (before the 9 months are up) if you are to avoid a S455 charge. The evidence of minutes etc is not really necessary because it is all about "payment".

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Replying to whitevanman:
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By blackdust567
07th Aug 2019 12:41

thanks very much for this advice, the accounts date is 31 March 2019

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By Andrew_hound
13th Aug 2019 16:05

Joining rather late in the day, I note the last sentence of the first paragraph re further advances. It is (or perhaps was) my understanding that repayments of such loans worked on the basis of 'last out, first repaid' i.e. the dividends must cover the whole of the loan as at the date the dividend is credited and not just that to the year end. I think the 30 day rule (or an implication of it) is then that there must not be a further loan for at least 30 days

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Replying to Andrew_hound:
Psycho
By Wilson Philips
13th Aug 2019 16:15

The bed and breakfast rules do not apply to repayment by way of dividend credited to the loan account.

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Replying to Wilson Philips:
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By Andrew_hound
13th Aug 2019 16:25

More than happy to be corrected on that point, thank you! However, wonder what HMRC will say if they see a full repayment made by a date within the 9 months rule and then a (substantial) loan started in the year and outstanding at the next year end. Have (and accept that this should be in the past tense these days!) always advised clients not to have an overdrawn balance at a following year end when discharging an earlier loan.

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Replying to Andrew_hound:
Psycho
By Wilson Philips
13th Aug 2019 16:45

HMRC can say what they want. At present there is nothing in the legislation to allow them to attack such arrangements from a section 455 point of view. If you think about it, the dividend will give rise to a tax charge that might otherwise have been paid as section 455 tax so HMRC are not really losing out. Of course, if the dividends are regular HMRC have other attack options open to them.

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By whitevanman
14th Aug 2019 15:39

S455 (more accurately its predecessor s286) was introduced as a form of anti-avoidance. If taxable income is taken and used to repay the loan, the provisions have done what they were supposed to do. So HMRC have no reason to be concerned.
B&B rules are aimed at circumstances where "repayment" is, for want of a better term, artificial. The legislation allows for a loan to be outstanding for, effectively, 21 months and as with so many other aspects of tax, if a taxpayer uses the legislation to his advantage, so be it. As I understand it, HMG (that is who legislates) had to accept such a situation if CTSA was to work for s455 as well as CT.

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By Philip J Redhead
25th Sep 2019 09:22

Please don’t forget there may well be beneficial loan interest that needs to be reported on a p11d, unless some interest has been charged on the overdrawn loan account.

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Replying to Philip J Redhead:
By JCresswellTax
25th Sep 2019 10:06

I'm sure that's useful info a month after the last comment lol

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