Director's loan and S455

Before considering extraction of profits we need to discuss the following crucial concepts: Director’s Loan Accounts and S455.

A Director's Loan Account acts as a unique ledger, detailing any money exchanged between a company and its directors that isn't part of their normal wages or expense reimbursements.

When a director injects their own funds into the company, this account reflects that the company is in debt to the director, with no immediate tax consequences. The director can return this loan at a convenient time.

Conversely, when a director withdraws money from the company for personal use, the account becomes "overdrawn", indicating the director's debt to the company. This is where tax considerations come into play.

Unless stated differently, these loans are typically interest-free. In this situation, the director gets a 'benefit in kind,' which means they're considered to have received an interest equivalent to what HMRC recommends. This 'deemed interest' is taxed just like a salary would be. Moreover, this scenario brings additional costs to compliance, as it necessitates the filing of a P11D form.

If this overdrawn amount isn't settled within nine months after the company’s year's end, it triggers Section 455, leading to an additional corporation tax charge of 33.75%(for the 2023-2024 tax year).

This tax is refundable when the loan is repaid, but the refund process can impact cash flow and might be a complex procedure for accountants, involving outdated methods like posting forms and making phone calls to HMRC (hence extra charge from accountants). Ironically, in an age where AI and space travel are pushing boundaries, HMRC's approach, with its somewhat archaic methods, feels oddly out of step, doesn't it?

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