Borrowing from your company – Can you avoid the tax charge?

If you intend to borrow from your company, can you avoid the tax charge?

HMRC has always discouraged director shareholders from borrowing money from their companies by implementing a special tax, known as a s.455 charge.

The amount of the charge is equal to 25% of the sum the director shareholder owes and hasn’t repaid within nine months of the end of the accounting period in which the borrowing occurred.

Until tough rules were introduced in 2012/13 it was relatively easy for companies to dodge some or all of the s.455 charge by using a process called “bed and breakfasting.”

The end of bed and breakfasting

Bed and breakfasting involved borrowing more from the company and using it to repay the original debt within the nine-month deadline. That meant the s.455 tax was rolled forward to the following financial year, when, if necessary, it would be bed and breakfasted again. This trick is no longer possible.

As bed and breakfasting is no longer effective, the only way to avoid s.455 tax is for you to repay your company what you owe it within the nine months following its financial year end. If you can’t afford to do that from your own resources, the anti-bed and breakfasting rules allow you to use the company’s money to do it, but only where it counts as your taxable income such as a dividend or a bonus

If your company can’t pay a dividend or bonus, the good news is that there’s an alternative way to avoid the s.455 bill that doesn’t involve repaying the debt.

Tip.

Changing your company’s financial period to end on a date before you borrowed money from it means there will be nothing for the s.455 charge to apply to.