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Logistics of s.455

Logistics of s.455

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I'm struggling with the logistics of applying the s.455 charge. 

This is a made up scenario. Let's assume the company's year end is 31 December 2021, today is today, it's close company, and the deadline for submission is 30 September 2022.

The accounts are prepared today and finalised. There is an overdrawn DLA of £10,000, I advise the client that if this can be paid back before 1 October 2022 no s.455 would apply. If we are trying to finalise the accounts today, do I include the s.455 or do I not?

1. If it's the case that the client believes he will pay it back, do I need to wait until just before the deadline day to confirm he has and then submit the accounts? This seems impractical so I'm sure this isn't the way.

2. If I go off of the client's word saying he will pay it back, I submit the accounts today, next year I then realise that he never paid it back and it should have been included in the 2021 accounts. Would the process be to amend the accounts and CT return?

I (believe I) understand the rules of the s.455 charge it's just the application of it in real life scenarios. Thank you for any help.

 

 

Replies (22)

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By RFL H
20th Jan 2022 10:16

1. You can finalise and submit the accounts to Companies house as the s455 tax debtor appears in the subsequent accounts.
2. Are there any distributable reserves? If so the director could declare a dividend to clear the loan account. If not you could wait until September to submit the CT600.

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Replying to RFL H:
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By TheNovice
20th Jan 2022 11:30

RFL H wrote:

1. You can finalise and submit the accounts to Companies house as the s455 tax debtor appears in the subsequent accounts.
2. Are there any distributable reserves? If so the director could declare a dividend to clear the loan account. If not you could wait until September to submit the CT600.

Thank you that's very helpful, there are no distributable reserves in my hypothetical example. I think my confusion comes from the fact that I thought that the s.455 charge would need to be included in the 31 May 21 accounting period rather than the subsequent period. Just to clarify then, if I did submit the accounts today knowing that the client's DLA would not be repaid I would still not post the s.455 untill the next A/P i.e. 31 May 2022?

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By SJRUK
20th Jan 2022 10:37

The S455 charge is repayable anyway, when the DLA is repaid and therefore the entry is both an asset and a liability, and doesn't affect the net balance on the Balance Sheet.

You do however, when submitting the CT600, need to enter the date of repayment in order to cancel out the charge.

In my experience its very unlikely that the accounts would be finalised anyway until several months after the year end and the actual situation is better known and treated accordingly in the accounts.

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Replying to SJRUK:
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By TheNovice
20th Jan 2022 11:32

SJRUK wrote:

The S455 charge is repayable anyway, when the DLA is repaid and therefore the entry is both an asset and a liability, and doesn't affect the net balance on the Balance Sheet.

You do however, when submitting the CT600, need to enter the date of repayment in order to cancel out the charge.

In my experience its very unlikely that the accounts would be finalised anyway until several months after the year end and the actual situation is better known and treated accordingly in the accounts.

Thank you, that's very helpful.

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By Tax Dragon
20th Jan 2022 12:23

Have a read of s458 and HMRC's 'commentary' on it - eg CTM61600f.

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Replying to Tax Dragon:
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By TheNovice
20th Jan 2022 14:26

Tax Dragon wrote:

Have a read of s458 and HMRC's 'commentary' on it - eg CTM61600f.

Hi TD, that's extremely helpful thank you.

I have the question now of how this is recorded in the Dec 21 accounts on the basis that the clients expects to pay this between now and 1 Oct 2022.

I must be missing something here, but I see no way around this:

1. I wait until 30 September 2022 to submit the accounts to confirm the loan is repaid.

2. I submit the 31 December 2021 accounts with no s.455 included on the client's worth that it will be repaid before 1 October 2022. What happens when by 1 October 2022 I check and the client has not been able to repay the outstanding balance (in terms of reporting/accounting entries, not the charge itself)

3. I submit the 31 December 2021 accounts with a s.455 included as the client states he will not be able to repay in time. What happens if he does manage to pay it all back on 1 October 2022 and I’ve already submitted those 31 December 2021 accounts (in terms of reporting/accounting entries, not the charge itself)?
RHL suggested has that the s.455 be accounted for in the next accounting period however the software I’m using throws it into 31 Dec 2021 a/p.

Thanks again.

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Replying to TheNovice:
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By Tax Dragon
20th Jan 2022 15:09

Seems to me that the tax charge arises when the loan is made, the tax is payable 9m1d after that year end and s458 does not apply until the loan is repaid/similar. In short, you can't give relief in anticipation of repayment, because relief isn't due until repayment. (In practice HMRC allows a set-off if repaid before the 9m1d date - which is probably wrong, but who's going to argue? - but it still needs to have been repaid.)

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Replying to Tax Dragon:
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By TheNovice
20th Jan 2022 15:48

Tax Dragon wrote:

Seems to me that the tax charge arises when the loan is made, the tax is payable 9m1d after that year end and s458 does not apply until the loan is repaid/similar. In short, you can't give relief in anticipation of repayment, because relief isn't due until repayment. (In practice HMRC allows a set-off if repaid before the 9m1d date - which is probably wrong, but who's going to argue? - but it still needs to have been repaid.)

Right, that makes sense and clears everything up for me.

I was wrongly under the impression that s.455 does not apply until after 9m1d or when the client knew that they could not repay the loan within 9m1d.

Whereas, s.455 applies where the loan is outstanding at the end of the a/p regardless of what I/client anticipate happening up to the 9m1d. Then, subsequently, this can be relieved under s.458 within the 9m1d or after.

I now also see how your original comment may have been more helpful to me than I first realised.

Thank you.

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Replying to TheNovice:
By johngroganjga
20th Jan 2022 15:38

TheNovice wrote:

I have the question now of how this is recorded in the Dec 21 accounts on the basis that the clients expects to pay this between now and 1 Oct 2022.

I must be missing something here, but I see no way around this:

1. I wait until 30 September 2022 to submit the accounts to confirm the loan is repaid.

2. I submit the 31 December 2021 accounts with no s.455 included on the client's worth that it will be repaid before 1 October 2022. What happens when by 1 October 2022 I check and the client has not been able to repay the outstanding balance (in terms of reporting/accounting entries, not the charge itself)

3. I submit the 31 December 2021 accounts with a s.455 included as the client states he will not be able to repay in time. What happens if he does manage to pay it all back on 1 October 2022 and I’ve already submitted those 31 December 2021 accounts (in terms of reporting/accounting entries, not the charge itself)?
RHL suggested has that the s.455 be accounted for in the next accounting period however the software I’m using throws it into 31 Dec 2021 a/p.

Thanks again.

I think you are over-thinking. You don't need to make any accounting entries in anticipation of S455 tax being paid at a future date - only when it is in fact paid. Therefore your ponderings over whether S455 tax will or will not be paid in future are a complete waste of time. Your 2021 accounts are not affected in either event.

This is about the accounts only. For the CT return you do indeed need to wait nine months, or until the loan is repaid if earlier.

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Replying to johngroganjga:
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By Tax Dragon
20th Jan 2022 15:46

johngroganjga wrote:

You don't need to make any accounting entries in anticipation of S455 tax being paid at a future date...

IANAA but this surprises me. It's a tax liability of the period in which the loan is made, it is payable at the same time as the rest of the tax for that period.

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Replying to Tax Dragon:
By johngroganjga
20th Jan 2022 16:00

Tax Dragon wrote:

johngroganjga wrote:

You don't need to make any accounting entries in anticipation of S455 tax being paid at a future date...

IANAA but this surprises me. It's a tax liability of the period in which the loan is made, it is payable at the same time as the rest of the tax for that period.

Yes but it's a tax liability of a fundamentally kind from the rest of what it will have to pay on the same date, and, furthermore, when it's paid it becomes a debtor. If you provided for it as a liability in anticipation if it becoming payable nine months after the balance sheet date you would also have to recognise a debtor of an equal and opposite amount. So the net asset position of the company would not be affected at all.

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Replying to johngroganjga:
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By Tax Dragon
20th Jan 2022 16:10

Thank you.

And your suggestion to stop thinking has now been implemented.

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Replying to johngroganjga:
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By TheNovice
20th Jan 2022 15:56

johngroganjga wrote:

TheNovice wrote:

I have the question now of how this is recorded in the Dec 21 accounts on the basis that the clients expects to pay this between now and 1 Oct 2022.

I must be missing something here, but I see no way around this:

1. I wait until 30 September 2022 to submit the accounts to confirm the loan is repaid.

2. I submit the 31 December 2021 accounts with no s.455 included on the client's worth that it will be repaid before 1 October 2022. What happens when by 1 October 2022 I check and the client has not been able to repay the outstanding balance (in terms of reporting/accounting entries, not the charge itself)

3. I submit the 31 December 2021 accounts with a s.455 included as the client states he will not be able to repay in time. What happens if he does manage to pay it all back on 1 October 2022 and I’ve already submitted those 31 December 2021 accounts (in terms of reporting/accounting entries, not the charge itself)?
RHL suggested has that the s.455 be accounted for in the next accounting period however the software I’m using throws it into 31 Dec 2021 a/p.

Thanks again.

I think you are over-thinking. You don't need to make any accounting entries in anticipation of S455 tax being paid at a future date - only when it is in fact paid. Therefore your ponderings over whether S455 tax will or will not be paid in future are a complete waste of time. Your 2021 accounts are not affected in either event.

This is about the accounts only. For the CT return you do indeed need to wait nine months, or until the loan is repaid if earlier.

That also makes sense, but is opposed to what Tax Dragon mentioned. Although I suspect both are somehow right.

The s.455 charge (if due) will then be included in the 2022 accounts as a debtor and liability.

It also makes sense practically as if I knew that none of my scenarios are relevant.

To throw a spanner in the works, the accounts production software that we use (BTC) includes the s.455 tax in the period that the loan realtes to. In my example it would therefore be included in the Dec 21 accounts.

Many thanks.

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Replying to TheNovice:
By johngroganjga
20th Jan 2022 16:43

TheNovice wrote:

The s.455 charge (if due) will then be included in the 2022 accounts as a debtor and liability.

To throw a spanner in the works, the accounts production software that we use (BTC) includes the s.455 tax in the period that the loan relates to. In my example it would therefore be included in the Dec 21 accounts.

At the end of 2022 the S455 tax, if due, will either have been paid, in which case it will just be a debtor, not a liability, or it will be several months overdue for payment, in which case account for nothing until it is paid.

How does BTC accounts production software know that there is a potential S455 liability, and where does it include it in the figures (i.e. what double entry)?

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Replying to johngroganjga:
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By TheNovice
20th Jan 2022 17:18

johngroganjga wrote:

TheNovice wrote:

The s.455 charge (if due) will then be included in the 2022 accounts as a debtor and liability.

To throw a spanner in the works, the accounts production software that we use (BTC) includes the s.455 tax in the period that the loan relates to. In my example it would therefore be included in the Dec 21 accounts.

At the end of 2022 the S455 tax, if due, will either have been paid, in which case it will just be a debtor, not a liability, or it will be several months overdue for payment, in which case account for nothing until it is paid.

How does BTC accounts production software know that there is a potential S455 liability, and where does it include it in the figures (i.e. what double entry)?

It's interesting to leave it out completely until paid, imagine a large overdrawn DLA and s.455 due. If the s.455 is not paid that means it's not reported within the accounts and the accounts would not show the relevant liabilities due to HMRC. It sure does make the reporting easier though!

I appreciate your point on it having no impact on the net assets being shown as debtor/liability.

When preparing the accounts on BTC with the CT600&CT600A it automatically sends the data into the accounts by default. This can again be journaled out but its default position is to send it in.

BTC journals it in as follows:
Debit tax charge in the P&L £10,000
Debit s.455 recoverable £2,000
Credit CT liability £12,000

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Replying to TheNovice:
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By Tax Dragon
20th Jan 2022 17:27

TheNovice wrote:

BTC journals it in as follows:
Debit tax charge in the P&L £10,000
Debit s.455 recoverable £2,000
Credit CT liability £12,000

IANAA (and I am not thinking... IANT) but I don't see what's wrong with that.

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Replying to TheNovice:
By johngroganjga
20th Jan 2022 18:12

There’s nothing wrong with BTC’s entries, but in my view and that of many others it’s pointless to gross up debtors and creditors by equal and opposite amounts. The people who say you should provide for the liability in advance are often the same ones who say the debit should be in the tax charge - they walk among us!

The point of accounts is to represent truthfully and fairly the financial position of the company whose accounts they are. Grossing up debtors and creditors does not help with that at all. What helps the reader of the accounts is to recognise the debtor when it has arisen, by the S455 tax having been paid, but not until it has arisen.

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Replying to johngroganjga:
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By Tax Dragon
20th Jan 2022 18:28

But the debt the debtor owes isn't collectible until another debt has been repaid - and then not until 9m1d after the end of the year in which that happens (I'm not looking s458 up again, but it says something like that). So whereas the liability is close at hand, the asset is distant.

I'm not arguing with you - what you say sounds right - but there does seem to be some sort of distinction, and if the software by default flags up a s458 'asset', I don't see the point of manually changing it every time. (OP - is there an option to change the default setting?)

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Replying to Tax Dragon:
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By TheNovice
20th Jan 2022 20:00

There's no way to change the defaults that I can see, other than do a reversing journal which seems counterintuitive.

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Replying to TheNovice:
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By Tax Dragon
20th Jan 2022 20:33

And (to me) pointless. The respondents who are accountants have said it's not wrong. Why do you want to change it, in fact?

And if the idea is to show a true and fair view, and the company has a current liability versus a future asset, I can see why there are those who walk among... you (I can't claim to be one of you) who hold to this approach.

Some (employee) loans seem to last so long you'd be forgiven for forgetting they were loans.

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Replying to Tax Dragon:
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By Hugo Fair
20th Jan 2022 20:58

You're surely not suggesting that some DLAs are merely the acceptable face of disguised remuneration loans ... you'll get Justin all agitated again. :=)

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By Calculatorboy
20th Jan 2022 15:54

I wouldn't overthink it , it doesn't really matter as long as recorded correctly on ct return. I hazard most directors will tell you they intend to repay it and its short term ( that's why they've probably disclosed it as a "loan" due within 1 year in the accounts they are responsible for)
If its not repaid then just record the debit next year

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