Funds taken out of the company as a loan (i.e. not salary or dividend) that is not repaid within nine months of the end of accounting period will attract a liability to Section 455 tax of 25% of the outstanding loan balance. Where the loan is repaid within 9 months of the year end the liability does not become due.
However, this rule has been used by some companies to recycle balances by repaying a loan within the 9 months, avoiding the s455 tax, and immediately taking out a new loan.
As a result, two new rules have been included in the Finance Bill to prevent these arrangements and these are outlined below.
Two new rules:
The first restriction imposes a 30 day test:
The second restriction imposes a less objective test but it is believed that problems may arise if it is not considered early on in the company’s accounting period:
The onus is on the company to consider whether the restrictions apply to repayments made after 20 March 2013 and amend its tax return accordingly.
These rules apply from 20 March 2013 and so it is necessary to review any balances outstanding to the company and consider the availability to make repayments so as to not fall foul of the restrictions.
It is therefore preferable to clear down any outstanding loan accounts as far as possible before the company’s year end.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.