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HMRC internal manual

Enquiry Manual

HM Revenue & Customs
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Close Companies: Settlement: Rewriting Director's Loan Accounts

Regardless of whether a case is settled by contract or assessment, company funds misappropriated by the directors of a close company should be regarded as loans or advances to them giving rise to liability under CTA10/S455. Relief under CTA10/S458 is available if these misappropriated funds are repaid (or released or written off on or after 6 April 1999) during the period covered by the enquiry or subsequently.

To compute the S455 liability the director’s loan accounts must be rewritten. Correcting entries in the company’s books and accounts is necessary otherwise the directors who had misappropriated company funds would be able to withdraw from their loan accounts in the future more than they were entitled, giving them an advantage over directors of companies where there had been no irregularities.

When you rewrite loan accounts to debit misappropriations you should follow these principles.

  • The amounts attributable to individuals should be arrived at in a manner appropriate to the way the omitted profits are calculated.
  • Where a director has more than one account (for example, a loan account and an unpaid remuneration account) the accounts should be amalgamated and the resulting net balance used.
  • Misappropriations should not be rolled up and debited in one sum unless it is clear the S455 liabilities for earlier years are insignificant.
  • Non-extractive adjustments, such as those required for directors’ bonuses, should be debited before misappropriations.

Where the rewritten loan results in relief for an AP within or preceding the period covered by the settlement this should be given for the earliest periods for which S455 liability exists with interest and penalties calculated on the correct S455 liability before relief. Any necessary apportionment should be on a time basis unless you consider some other method is more appropriate.

Penalties should be sought for S455 liabilities arising on extractions when penalties are sought for the related CT liabilities, or would be but for losses. Normally the level of penalty should be the same as the penalties on the related Corporation Tax liability. Where there are also non-extractive additions it may well be appropriate to apply different levels of penalty to extractive and non-extractive elements of the settlement. For periods with a filing date on or before 31 March 2009 you will abate penalties, see EM6050+. For periods beginning on or after 1 April 2008 with a filing date on or after 1 April 2009, you will consider the reduction of penalties for the type and quality of disclosure, see CH82400+.

For a loan or advance made for an AP ended on or after 31 March 1996 no penalty arises if the whole of the loan giving rise to CTA10/S455 liability is repaid etc earlier than 9 months and 1 day after the end of the accounting period in which it was made.

Before reaching a settlement you should confirm that the amending entries have already been made in the company’s books, or obtain an undertaking that this will be done in the accounts of the current accounting period. You should inform RIAT who will then check that the full amounts are brought in.

Should you encounter refusal to amend the books or accounts, point out that failure to act would amount to writing off or releasing the debt due to the company. Liability to higher rate tax would then arise under ICTA88/S463 and possibly Class 1 NIC for the company CTM61630. If the refusal persists, make a report to contact link.