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S455 tax not payable?

S455 tax not payable as loan is for a prescribed term and interest rate?

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Doing some due diligence for a client who is in talks to buy another business. The DLA is overdrawn but an agreement is in place to pay this back over 10 years (relevant note is below). Obviously, with the term being 10 years, the DLA will still be overdrawn when S455 would be due. Accountant for seller (who works for a reputable firm, hence why I'm seeking a second opinion) has stated that S455 will not be due as the loan is for a prescribed term and interest is charged. I think S455 would still be due on the outstanding amount at that date. Who is correct? 

Directors Advances, Credits and Guarantees
Included within Debtors are the following loans to directors: £67,185. Loan payable over 10 years at
an interest rate of 2.25%.

Replies (14)

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By Geoff56
04th Nov 2021 11:46

Paying interest of at least the official rate, will only prevent the benefit-in-kind of a cheap loan. It doesn't get you out of the S.455 tax on loans to participators.

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Replying to Geoff56:
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By Paul Crowley
04th Nov 2021 11:48

+1
s455 is still due

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Replying to Geoff56:
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By Paul Crowley
18th Dec 2021 13:51

Now confirmed by Tim Good and the good Giles

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By Tax Dragon
04th Nov 2021 11:51

Are directors being confused with participators, and (as Geoff56 hints) BIKs with s455?

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Replying to Tax Dragon:
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By Tax Dragon
04th Nov 2021 11:55

And if the director in question is in fact also the shareholder, why isn't the loan being repaid at the time of the sale?

(Though from your DD viewpoint, you've got the [possible consequences of the] possible non-compliance if your client is buying the shares not the trade and assets.)

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Replying to Tax Dragon:
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By Kevinmck14
04th Nov 2021 12:17

The director is also the sole shareholder. The company has significant existing debts to HMRC etc.. after paying everything off, the current owner will only walk away with £20k (before repayment of DLA). The DLA at present is £80k so this doesn't cover it. I've suggested clearing as much of the DLA as possible with dividends but that still leaves around £15k (only circa £65k distributable reserves at present). Suggested writing this off before the 1st Jan deadline when S455 would be due (and pay whatever NI is due on the write-off). Sellers accountant wants to wait until reserves are available to fully clear the DLA with divi's but this will be after 1st Jan....however, they are adamant S455 wouldn't be due at that point. Proposed sale date is in Feb

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Stepurhan
By stepurhan
04th Nov 2021 12:34

If, due to the sale of the business, they were no longer a participator at the accounts year end then s455 would not be due. This is because what is now a DLA would have simply become a loan to a now unconnected person at that date.

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Replying to stepurhan:
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By Tax Dragon
04th Nov 2021 12:46

I wondered that. More specifically, if tax is due 1 Jan and sale is in Feb, does the sale trigger repayment of the tax?

I don't know the answer. You might have to factor in s454(2)(b) [and s453] in arriving at the answer, but I haven't worked it through.

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Replying to Tax Dragon:
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By Tax Dragon
04th Nov 2021 13:03

Tax Dragon wrote:

You might have to factor in s454(2)(b) [and s453]...

Actually I might have got my windows where my doors should be with that comment. (Like I say, I haven't really thought about it.)

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Replying to stepurhan:
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By Kevinmck14
04th Nov 2021 12:53

Last YE was 31st March 2021. Loan was outstanding at that point. S455 due 1st Jan as loan won’t be repaid at that point. When the sale goes through in Feb, would it be possible to get the S455 back straight away? Or would we still need to wait until the following year?

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Replying to Kevinmck14:
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By Tax Dragon
04th Nov 2021 13:07

Your DD sounds like it is starting to stray into providing advice.

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Replying to Kevinmck14:
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By Tax Dragon
04th Nov 2021 16:11

Kevinmck14 wrote:

When the sale goes through in Feb, would it be possible to get the S455 back straight away? Or would we still need to wait until the following year?

I've now thought about it (well, read s458) and the answer is no - relief follows repayment or release of the loan, not sale of the company. (Same, btw, if sale happened before tax was due on 1 Jan - stepurhan is wrong.)

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Replying to Tax Dragon:
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By Kevinmck14
04th Nov 2021 16:26

Thanks for your helpful advice tax dragon

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Replying to Tax Dragon:
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By Justin Bryant
17th Dec 2021 14:29

That's probably all academic in practice as I doubt anyone would buy a company with such a loan outstanding in the 1st place.

The opposite situation is the more interesting/relevant one i.e. there's no s455 charge if you become a participator (or connected thereto) after a loan.

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