What is a section 455 tax charge?

A section 455 charge is not a penalty. It's a temporary corporation tax charge that HMRC applies when a director, or another participator in a close company, borrows money from the company and hasn't repaid it within nine months of the accounting period ending.

The charge sits on the company, not on you personally, though it's triggered by your loan. It's designed to stop directors using company money instead of taking salary or dividends, both of which carry their own tax.

Once you repay the loan, or the company writes it off, HMRC refunds the charge. It's a cash-flow cost while the loan is outstanding, not a permanent tax loss, provided you handle the repayment correctly.

Section 455 Corporation Tax Act 2010 sets out the charge. It applies to "close companies", broadly those controlled by five or fewer participators or by their directors, which covers the vast majority of small limited companies.

The trigger is simple: has the loan been repaid within nine months and one day of the end of the accounting period in which it was made? If not, the company must include the s455 charge on its corporation tax return under Paragraph 24 Schedule 18 Finance Act 1998, which governs the company return and the enquiry window HMRC uses to check it.

Section 464A extends the same principle to arrangements designed to get around section 455, for example loans made through a partnership or another company you control. HMRC treats these "bed and breakfasting" style arrangements with particular suspicion during an enquiry.

If the loan is later repaid, the company claims relief. The repayment must be genuine and lasting, not a short-term repayment followed by a fresh withdrawal shortly afterwards, which HMRC will look through.

If HMRC is asking about your director's loan account during an enquiry, they are usually checking two things: whether the loan was properly recorded, and whether the s455 charge was correctly calculated and paid on time.

You need clear accounting records showing when money moved between you and the company, and when any repayment happened. Informal repayments, or repayments funded by a further loan from the company, rarely stand up to scrutiny.

If the loan exceeds £10,000, there are also separate benefit-in-kind and National Insurance consequences to consider, on top of the s455 position. An enquiry into your loan account often looks at both together.

Get the loan cleared, or formally waived and taxed as a distribution, as early as possible. Leaving it open and unresolved during an enquiry gives HMRC more grounds to ask further questions.

The s455 charge itself is repayable, so the real cost is usually cash-flow: your company pays it nine months after the year end and can't reclaim it until the loan is cleared, which can take years if the loan runs on.

If HMRC opens an enquiry and finds the charge was understated or omitted, interest runs on the unpaid amount, and a behaviour-based penalty may follow if HMRC considers the error careless or deliberate.

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Don't assume a loan repaid just before the nine-month deadline, then re-drawn shortly after, avoids the charge. HMRC's anti-avoidance rules specifically target this pattern.

Don't record dividends as a way to clear a loan without the paperwork to support them. A dividend needs sufficient distributable profits and a proper board resolution.

Don't leave the s455 charge off the company tax return because you plan to repay the loan later. The charge is based on the position nine months after the year end, not the eventual outcome.

Don't ignore correspondence about your loan account. A section 455 question in an enquiry rarely goes away, and the interest clock keeps running while it's unresolved.