HMRC holds its line on director loan tax charges
28 May 2024
By Matt Jukes
HMRC appears not to have changed its position on issuing personal tax charges upon a decision by an IP not to pursue directors’ loans – despite a belief from R3’s tax working group that it was going to do so.
When a close company makes a loan to a ‘participator’ – a shareholder or person with an interest in the company – it triggers a tax charge under section 455 of the Corporation Tax Act 2010 at 33.75% of the loan for the period of accounts in which it was made. The tax is then due nine months after the end of that accounting period. It is seeking the repayment of s455 tax into an insolvent estate that can then create a potential issue.
Writing in the Summer 2024 edition of R3’s Recovery magazine, Marcus Rea, chair of the R3 Business Tax Working Group said: “We thought we had persuaded HMRC that a decision by an IP not to pursue a debt from a director ought to be sufficient to enable any s455 tax to be repaid without triggering a tax charge on the individual.
“HMRC’s recollection differs. It seems to have accepted this [the above] view in terms of the s455 repayment. However, it is also of the view that this can only be as it is equivalent to a write-off and triggers a personal tax charge.”
If a loan has been made some time before an insolvency situation and the tax paid, the repayment becomes a potential asset of the insolvent estate. When this repayment triggers a personal tax charge, Rea says, this may complicate the often-lengthy loan repayment discussions with directors who do not wish to incur income tax.
He added: “A claim by the company via its IP to recovery of the s455 tax by reason of a write-off or release of the director’s debt – or, according to the HMRC view, the decision by the IP not to pursue the debt – apparently automatically triggers a ‘nudge’ notice being sent to the director from HMRC reminding them that income tax will now be due with the expectation that it be included in their self-assessment return. Therefore, even if a director was not aware of the personal tax implications during the negotiation on repayment of a debt, they soon will be.”
Due to the minimum of a nine-months’ time lapse between releasing a loan or deciding not to pursue it and repayment of the s455 tax, Rea says that IPs will need to weigh up the value of the tax against the cost of extending the insolvency further.
