The recent Budget announced a new rule affecting loans and other advances made by companies to their shareholders. If you owe your company money, is this something you should be concerned about?
S.455 tax
If you’re an owner manager of a close company (broadly one owned or controlled by five or fewer individuals) you probably know that a tax charge can apply if a participator, e.g. a shareholder, owes it money which isn’t repaid within nine months of the end of the accounting period in which the debt arose. The tax, known as a s.455 charge, is equal to 33.75% of the debt remaining at the nine-month deadline. When the debt is cleared HMRC refunds it, but no earlier than nine months following the end of the accounting period in which the debt was cleared.
Anti-avoidance
Existing anti-avoidance rules are designed to prevent avoidance of the s.455 charge where a participator borrows more money to clear an existing debt before the nine-month deadline is reached. This is known as bed and breakfasting (B&B). However, some companies have found a way around the B&B rule by exploiting a loophole. Put in simple terms, the loophole works by using two or more businesses to create a chain along which the debt can be shunted from one to another so that the nine-month s.455 trigger date is never reached.
Budget change
The Chancellor announced in her Budget that the existing anti-avoidance rule is to be scrapped and replaced with a tougher version which blocks the “chain” avoidance trick. The new rule took effect from Budget day (30 October 2024). Unless your company is involved in the type of avoidance described above the new rules will have no tax impact on you or your company.
Tip. The good news is that there are still legitimate ways to prevent the s.455 charge, including one involving dividends that doesn’t require you or your company to raise any cash to clear the debt.
The new rules are aimed at a relatively small number of companies which use a chain of businesses to shuffle debts between themselves to dodge the loan-related tax charge. Unless your company uses this type of avoidance, you’ve nothing to worry about.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.