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TonyTax
TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Hi There, UK Tax Question We have a Ltd Company which

Customer Question

Hi There,

UK Tax Question

We have a Ltd Company which has recently (last week) ceased trading. The company will be liquidated and the assets distributed to the shareholders as a capital distribution which will be subject to Capital Gains Tax at the 10% Entrepreneur's rate.

Included in the company assets are an overdrawn Director's Loan balance £50,000 and a s.455 tax asset of £12,500.

My question is can the £12,500 be reclaimed from HMRC on liquidation, if the underlying Directors Loan account has actually not been repaid?

Thanks,
Danny
Submitted: 4 years ago.
Category: Tax
Expert:  TonyTax replied 4 years ago.
Hi.

Will there be a formal liquidation process involving a liquidator or will you be handling the winding up yourself?
Customer: replied 4 years ago.

Hi TonyTax,


 


A liquidator will be appointed and a formal liquidation undertaken.


 


Thanks,


Danny.

Expert:  TonyTax replied 4 years ago.
Thanks.

Leave this with me while I draft my answer. There is a fair amount to it so please bear with me.
Expert:  TonyTax replied 4 years ago.

Hi again.

If the company will be going through a formal liquidation process, the liquidator will be duty bound to try to recover any monies owing to the company from whoever the debtors are and that includes directors. If the liquidator formally writes off the loan, there may be income tax implications for the director concerned (see below).

 

Normally, the Section 455 tax will not be repaid unless the loan is repaid. However, if the company is a close company and the loan is written off and there is a personal tax charge on the director, it may be possible to reclaim the Section 455 tax from HMRC.

 

If the loan is not repaid and is effectively forgiven or written off there may be personal tax implications for the director who is indebted to the company. It depends how any write off is arranged and whether the company is a close company or not. The amount written can be treated as a distribution net of basic rate tax so if the director is liable to tax at higher rates, there will be further tax to pay. National Insurance Contributions may also be payable.

 

You should discuss the matter with the liquidator who will look at your situation in detail and make proposals as to the best way to manage the overdrawn loan account. In my experience, a good liquidator can find ways to arrange matters to minimise adverse tax situations.

 

Take a look at the notes here which give some more detail on the tax implications around the write off of an overdrawn director's loan account.

 

I hope this helps but let me know if you have any further questions.

Customer: replied 4 years ago.

Hi Tony,


 


Thanks for you answer.


 


We are not proposing to write off the loan balance as this will lead to additional tax due. I am aware of the treatment of a loan written off.


 


The main point of my question is whether the liquidator will be able to recover the s.455 paid as it is a company asset, or if HMRC are likely to refuse to repay this unless the see evidence that the loan has been repaid.


 


It is not intended that the loan will be either repaid or written off.


 


My other option is to send a non-statutory business clearance request to HMRC.


 


Thanks,


Danny.

Expert:  TonyTax replied 4 years ago.
You have to make a claim for repayment of Section 455 tax either in a corporation tax return CT600 or by letter depending on when the claim is made and HMRC may ask for evidence that it has been repaid. Take a look under the heading "When you can reclaim the corporation tax" here.

The liquidator won't ignore the loan and will want to account for it in some way, either by writing it off or having it repaid to the company. He cannot ignore it.

The informal claim procedure which is no longer non-statutory but enshrined in legislation limits the amount that can be paid as a capital distribution to £25,000. Anything over and above that is treated as dividend. Take a look here for more inormation.
Expert:  TonyTax replied 4 years ago.
Hi again.

I can see that you have read all my responses to your questions. If there is anything you still wish to ask please do so. If not, would you kindly rate my answer so that I get paid for my work. Thanks.