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Dividends to clear overdrawn Directors Loan?

Does it avoid s455 tax?

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Simple? question really.....!

We all know that if a directors loan is cleared after the year end by a dividend or bonus (and that income is charged to tax at whichever rate) then that dividend can be used to clear the balance within 9 months and as such be entered on the CT600a to say the loan has been repaid and negate the s455 tax charge.

And also that there are rules stating that if the loan is repaid and a similar amount drawn around teh same time HMRC will treat the loan as not being repaid (from the rules that came in in March 2013) but my question is whether this also applies to dividends and what if the loan accumulates over time.

Scenario - at 31 December 2016 year end director had an overdrawn loan of £25k. The company votes a dividend on 6th April 2017 of £15k and another on 30 June 2017 of £10k (has to be done in this way to allow reserves to be built up). The dividend paperwork states that the dividend is being used to clear the loan balance from 31 December 2016 first and then any money left to clear subsequent loan account withdrawals. (since 31 December 2016 the loan account will oncrease by some £2-3k per month so at 6th April 2017 the balance would be £35k (ish) (bfwd + £10k drawn since)

I think this is absolutely correct and fine to go with using the "claytons rule" (see an earlier post on this topic) https://www.accountingweb.co.uk/any-answers/me-again - so I think all is fine but i wanted to check because in my case there is historic s419/455 paid against the loan balance and we will ask for all of this to be repaid using this rule/principle.

Does anyone see any issues that maybe HMRC will question the repayment when we submit the repayment claims?

Any thoughts most welcome!

 

 

 

Replies (7)

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By johngroganjga
29th Dec 2016 07:46

As you say, dividends are outside the scope of the bed and breakfasting rules.

And yes repayments clear the loans on FIFO basis in the absence of any agreement to the contrary.

Thanks (2)
By John Webb
29th Dec 2016 09:05

Thankyou John.
I was sure I was right but we will be submitting a repayment claim for the £5k of historic s419/455 and just want to be 100% sure that any questions that might ensue are easily answered!
Always feels odd that the new rules (from 2013) allow you to go overdrawn and avoid s455 in full by just declaring a dividend later

Thanks (1)
Replying to John Webb:
By petersaxton
29th Dec 2016 09:32

But that's the same as if a dividend was declared and paid out and then the funds used to repay the loan.

Thanks (0)
Replying to petersaxton:
By John Webb
29th Dec 2016 09:39

Hi Peter
Do you think it "doesn't work" ie we cant use the dividends post YE to clear the DLA and reclaim s455. I know if it was cash paid in then it wouldn't count as he has drawn out since but dividends are OK as John confirmed.

If I am wrong please let me know as I don't want to get this wrong!

Thanks (1)
Replying to John Webb:
By Ruddles
29th Dec 2016 10:28

The 'new rules' haven't changed anything in that regard. HMRC have always had the power to challenge any 'artificial' repayment - the legislation merely put those powers on a statutory footing.

The apparent anomaly can easily be reconciled by considering an alternative means of clearing the debt - by releasing it.

Thanks (0)
Replying to Ruddles:
By John Webb
29th Dec 2016 12:03

Thanks Ruddles - so are you saying that voting a dividend to clear the old balance will not work? I am confused!

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Replying to John Webb:
By Ruddles
29th Dec 2016 12:21

No - I am saying that voting a dividend to clear the balance, old or new, will work, just as it always did. (Provided that the dividend is credited directly to the DLA)

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