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Mark McLaughlin warns of a potential trap concerning the late notification of overdrawn director-shareholders’ loan accounts to HMRC, where the overdrawn balance was repaid.

Introduction

There are statutory time limits for notifying chargeability to various taxes, including the tax charge that can arise when a company director-shareholder’s loan account becomes overdrawn.

Don’t Be Late!

The general time limit for a company to notify chargeability to tax (where HM Revenue and Customs (HMRC) has not given a notice to file a tax return) is 12 months from the end of the accounting period (FA 1998 Sch 18 para 2(1)).

Penalties may be charged if this deadline is missed.

Overdrawn Loan Accounts

The company is generally liable to tax (at a current rate of 32.5%) under the ‘loans to participators’ provisions (CTA 2010 s 455) in respect of the outstanding loan.

Relief from this tax charge is available to the extent that the loan is repaid (or released or written off). If, for example, the overdrawn loan account is fully repaid before the normal due date for the company’s tax liabilities (i.e. nine months and one day after the end of the relevant accounting period) relief from the ‘section 455 tax’ can generally be claimed without the tax having to be paid.

However, if the loan account was repaid on or after the due date for the section 455 tax, relief is not available until nine months from the end of the accounting period in which the loan was repaid (CTA 2010, s 458(5)).

Is Repayment Enough?

It might be assumed that there is no need to notify HMRC of a section 455 tax charge if the overdrawn loan account has been repaid. However, this is incorrect: penalties can arise for failing to notify HMRC.

For example, in Starflex Contractors Ltd v Revenue and Customs [2019] UKFTT 31 (TC), the appellant company was late in filing tax returns for its accounting periods 2011 to 2014. Following enquiries by HMRC, overdrawn director-shareholders' loan account balances were agreed for each of the periods ended in 2011, 2012 and 2013. HMRC sought penalties (under FA 2008 Sch 41) for the late returns/failure to notify chargeability, and in respect of the loans. The company’s agent argued that the penalties relating to section 455 should be cancelled as there had been no actual loss of tax (from the failure to notify) “…as over the years the tax effect is neutral as each year negates the other…”

However, the First-tier Tribunal concluded that the overdrawn director-shareholders' loan account caught by section 455 should be included for penalties purposes. The legislation specifically disallows taking into account any relief which has been deferred under section 458(5) until the repayment of director’s loans in subsequent periods, as indicated above (FA 2008 Sch 41 para 7(4)).

Practical Point

Unlike the penalty regime for careless errors in tax returns, penalties cannot be suspended for failure to notify. However, a ‘special reduction’ in penalties is possible in ‘special circumstances’ (FA 2008 Sch 41 para 14). There is also a potential let-out from penalties for a non-deliberate failure to notify if there is a ‘reasonable excuse’ for the failure (FA 2008 Sch 41 para 20).         

The above article was first published in Tax Insider (March 2019) (www.taxinsider.co.uk).