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Reciprocity
"“The government will increase the loans to participators tax rate from 25% to 32.5%"
So will loans TO the company be able to attract interest at the same rate ?
mikewhit, you don't appear to understand this at all.
It is not an interest charge, it is a tax charge, so the answer is no. It isn't lack of reciprocity.
Cash Flow problem
I don't advise clients to get involved with s455 tax at all, unless there is no other option, like losses or insufficient profits preventing dividends. This has to be temporary solution whilst a hole is being dug out of. Alternatively, profitable businesses where the director has just withdrawn far too much money, get hit with this, usually from a lack of any financial discipline, like ignoring the need to leave money in the company for Corporation Tax, PAYE and VAT.
When the tax is paid it can only be recovered after nine months from the year end in which it is repaid. Corporation Tax is due by the end of the ninth month, so the s 455 refund won't be received in time to help settle the bill - bad cash flow management. For this reason alone, I don't recommend it and I don't recommend it where a bit of financial planning would avoid the problem.
Easily avoidable
Year end loans can be cleared by book entry within 9 months, which avoids the tax becoming payable even though you still need to file a CT600A. By book entry, I mean salary, dividend, expenses, whatever, being credited to the director's loan account as they arise. It doesn't matter if the director takes those items in cash at the same time. That constitutes a new loan.
In an ideal world, all participator loans would be dealt with like this. They should only ever be temporary stopgaps. Unfortunately, a lot of accountants aren't proactive enough in this area. Obviously it is difficult to stop indisciplined or cash-strapped clients from over-drawing in the first place, but I think far too may CT600As are filed without repayments on.
The 9 month rule is widely misunderstood. People seem to think that an actual cash repayment is required, not just a book entry.
Directors
This seems that Directors are being targeted by the conservative government.
They have raised taxes on s455 loans, which in most small business cases are written over to dividends. Then they have attacked the dividend payments themselves. It seems to us here at ITA, that this government would prefer all small company directors to now become self employed.
Then on the otherhand, we have compliance picking on the self-employed, stating that they should in turn be employed, and pay more tax etc.
They can't have it both ways, if you take any advantage of being a Director away, then there will be no small companies to employ all these self-employed, then what are compliance going to do. This will have a massive impact on small businesses, we already have several of our clients in a panic.
Maybe Mr Osbourne need to take a course in accountancy and finance.
"Easily avoidable" - not so simple
Since the introduction of the anti- Bed & Breakfasting rules.
If you want to "repay " it by so-called book entry & are looking at loans/repayts in xs of £5k/£20K, then that credit has to be taxable to be effective for s.455 purposes if further withdrawals follow. Hence salary or div credits fine, expenses or other non-taxable credit, then not in circs where anti-B&B rules applicable.
Expenses OK
Since the introduction of the anti- Bed & Breakfasting rules.
If you want to "repay " it by so-called book entry & are looking at loans/repayts in xs of £5k/£20K, then that credit has to be taxable to be effective for s.455 purposes if further withdrawals follow. Hence salary or div credits fine, expenses or other non-taxable credit, then not in circs where anti-B&B rules applicable.
Repaying a loan by offset against money the company owes you is perfectly OK. It doesn't matter what form it takes. The B&B rules are to address a different situation entirely, where you pay back the loan in cash and then withdraw the same funds shortly afterwards.
And actually, expenses are taxable until such time as you claim them on your tax return or (under the new rules) your employer decides that they do not give rise to a taxable benefit or require payrolling.
Simple?
I don't think everyone thinks it is as simple and straightforward as you evidently believe eg
https://www.accountingweb.co.uk/anyanswers/question/loans-participators
Never said it was simple
Nothing about tax is simple and I never used that word in my 2 previous posts. I merely said that s455 tax is easily avoided, at least more easily than people think. That's not the same thing.
I've had another look at that thread (I remember mulling over it the first time it came out) and although I accept that section 464C is not as clear as it should be, I really don't think we should agonize over it too much. Not when it comes to expenses anyway.
It is not the incurring of expenses or the preparation/submission of an expense claim that creates an obligation to pay the claimant. It is the authorisation of that expense claim, and in an owner-managed company, that happens at the same time it is credited to the loan account. There is no intervening stage at which it loses its status as an item giving rise to a (potential) charge to income tax.
That's because the director has already given his company a standing instruction to treat it that way, so it happens automatically. No need to wait for the accountant to write it up in the books.
In any case, I don't see the difference between offsetting one debt against another and repaying it in cash. One is as good as the other for s455 purposes. I do accept, however, that if it is a repayment that does not give rise to a tax charge, you need to watch the B&B rules.
I think we do need to agonize in some cases
at least a little!
I would refer you to HMRC commentary on the operation of the S.464C (6) exclusion at CTM61642.
Their emphasis is that the repayment itself should give rise to an IT charge (even if no tax payable eg in BR div situation) on the participator to which the original loan relates and they are quite specific on that, to the extent of distinguishing the circumstance of a crediting of rent, as that is not in itself per se immediately taxable, just potentially so as part of a subsequent calculation. Equally in that para they comment specifically on the open question left at the end of the Aweb thread I linked, to say they do not consider the credit of a dividend previously paid out in cash to the loan account as qualifying for the (6) exclusion as the repayment that it represents is not itself taxable.
So I am not so sanguine as you that the crediting of expenses will undoubtedly qualify as taxable for the purposes of the exclusion, at least from HMRC interpretation of the statute.
HMRC Manual not gospel
I would argue with HMRC on their interpretation of section 464C with regard to rent. It seems a bit disingenuous to me, saying that it isn't the rent that's taxable, just the profit on the rent. After all, there wouldn't be a tax charge at all if there wasn't any rent.
We all know the HMRC Manual is not the oracle when it comes to contentious tax issues. I always go back to the legislation myself if there's any room for doubt. I wouldn't take their word for it.
I suppose if the company paid the rent invoice direct to the participator's bank account and he then transferred funds to the company, it would get round that argument. You'd then just need to watch the normal B&B rules.