If you hold shares or voting rights in a company, you may be classified as a ‘participator.’ When a participator (or their associate) owes money to a close company, Section 455 tax, along with corporate tax on company profits, may be applicable.
Let’s delve deeper into what a participator is, the definition of a close company, and the impact of Section 455 Tax on your tax liabilities.
Defining a Participator in a Close Company
A ‘participator’ generally refers to someone with a stake in a company’s capital or income. In practical terms, it usually means any shareholder.
A participator in one company who controls another is also considered a participator in the controlled company.
Identifying an Associate and a Close Company
An ‘associate’ includes a participator’s relatives or partners. Relatives are defined as:
- Your spouse, civil partner, siblings
- Your parents, grandparents
- Your children, grandchildren
- Half-siblings are included, but step-siblings without a blood relationship are not. ‘Partner’ refers to members of a general partnership and LLPs, but not informal business partners.
- Trustees of a trust where the participator is a beneficiary or settlor, or a relative is the settlor, are also considered associates.
A close company is typically a UK-resident company controlled by five or fewer participators or by directors who are participators.
Understanding a Director’s Loan Account (DLA)
In a family or personal company, financial transactions are recorded in a Director’s Loan Account (DLA). This includes money not classified as salary, dividend, or expense repayment, or funds you’ve previously invested or loaned to the company.
An overdrawn DLA, possibly resulting from Covid-era loans, may trigger Section 455 tax considerations.
Explaining Section 455 Tax and Its Impact
Section 455 tax is a provisional charge on amounts owed by participators not repaid within 9 months and 1 day after the accounting period’s end. The most common scenario involves an overdrawn director’s loan account.
Key Points of Section 455 Rules:
- Post-accounting period repayments might be offset against later advances rather than the period-end balance.
- Repayments from income-taxed sources (like dividends and salaries) can offset the prior period-end balance. Other repayments might first apply to later advances, potentially incurring a Section 455 charge.
- The 30-day rule applies if a participator repays £5,000 or more and then takes a new advance within 30 days.
- The arrangements rule applies to repayments where there’s an intention to take a new advance of at least £5,000 in the future.
- Amounts owed at an accounting period’s end, not repaid within the specified timeframe, incur a Section 455 charge at 33.75% (32.5% for advances made before 6 April 2022).
- Section 455 tax is payable along with any corporate tax for the accounting period of the advance.
- Refunds for Section 455 tax can be claimed after repayment, subject to specific time limits and conditions.
- Write-offs are treated as repayments but have additional legal and tax considerations.
Speak to us about Section 455 Tax
If you’re considering writing off any advances, or have questions about Section 455 tax charges, please reach out to us for advice on the tax and related implications.
