The tax rules on repayment of director’s loan accounts and bed & breakfasting arrangements

My client is a sole director/shareholder of a limited company, and currently has an overdrawn director’s loan accounts (DLA) of £25,000. They are looking for ways to avoid paying section 455 tax, and has asked me if he repays the entire amount just before the due date and then re-borrows it after more than 30 days, will that work?

 

The bed and breakfasting rules at section 464ZA (1) Corporation Tax Act 2010 (CTA 2010) relate to director’s loan accounts.

 

The rules stipulate that the original loan remains liable to s455 penalty tax even if it is repaid by the due date if within any period of 30 days repayments of £5,000 or more are made to the company, and the shareholder re-borrows £5,000 or more from the company.

 

This is because the repayments within that 30-day period are attributed to the later borrowings, rather than the original.

 

HMRC’s manual at CTM61630 explains the 30-day rule in detail along with worked examples.

 

Most people therefore have a misconception that re-borrowing after more than 30 days will get around the bed and breakfasting rules and so the penalty tax will not be due.

 

This is not true because s464ZA(3) applies bed and breakfasting rules even if re-borrowing occurs more than 30 days after the repayment in situations where the original loan amount was £15,000 or more, and there were arrangements at the time of repayment to re-borrow money from the company, and the new borrowing is £5,000 or more.

 

HMRC’s manual at CTM61635 explains what is considered as arrangements for the purposes of s464ZA(3).

 

The legislation, however, provides respite under section 464ZA(6), which states:

 

‘This section does not apply in relation to a repayment which gives rise to a charge to income tax on the participator or associate by reference to whom the loan, advance or benefit was a chargeable payment.’

 

This means that the bed and breakfasting rules do not apply where the repayment itself gives rise to a charge to income tax on the shareholder, and the company will not be liable to pay the penalty tax because the repayment will be matched to the original loan.

 

HMRC’s manual at CTM61642 explains this exception in detail, especially pointing out that the exception is only available where the repayment comes from the same company source, and the money does not actually leave the company.

Please note that for payments before 30 October 2024, the relevant legislation was at s464C CTA 2010, and parts of the HMRC manuals still use that section for reference.

 

For further guidance on bed and breakfasting arrangements please call us.

To find out more about how this will affect your company and employees please contact your KKVMS advisor.