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HMRC internal manual

Enquiry Manual

Close companies: settlement: failure to notify CTA10/S455 and CTA10/S464A liability

Before CTSA failures to notify liability under CTA10/S455 were relatively common.

For CTSA accounting periods the company must self-assess its liability in making a return, so failure to include a S455 or S464A liability means the company return is incorrect. The potential for full enquiry should be considered when either a pre-CTSA failure to notify or a CTSA omission is discovered as the Section 455 or section S464A failure/omission does say something about the directors’ and the accountant’s attitude to compliance.

For the purposes of the Companies Acts, the accounts of a company are required to disclose loans or advances made to directors. Accounts that include loans or advances to participators under general headings, such as sundry debtors, may not be `incorrect’ accounts for tax purposes.

An offence of submitting incorrect accounts would, of course, have been committed if the loans had been, through fraud or negligence, wrongly described in the accounts by

  • inclusion of a participator’s loan account under `trade debtors’. This is at least negligent
  • aggregation of credit and debit balances on participators’ loan accounts with the effect of concealing the true position for each participator. This is an incorrect description of the balances since it is not correct practice to net off creditors and debtors.

But for pre-CTSA APs the only offence will normally be the failure to notify the liability under ICTA88/S419 rather than incorrect accounts. For CTSA APs the company return is incorrect regardless of whether or not incorrect accounts have been submitted.

Whether a

  • ‘failure to notify’ offence or
  • ‘fraudulent or negligent’ submission of accounts or
  • ‘deliberate or careless’ inaccuracy in a return for periods beginning on or after 1 April 2008 with a filing date on or after 1 April 2009

occurred very much depends on the facts for each case. The inclusion in ‘debtors’ or ‘sundry debtors’ of the participator’s loan account, not discovered until 12 months after the end of the accounting period, is a failure to notify offence because a participator’s overdrawn loan account balance is a debtor, so it is not incorrect to show it as such in the accounts.

When following the guidance EM6080 concerning abatement for gravity in respect of a Section 455 failure to notify offence for a pre-CTSA AP you should take into account such factors as

  • the size of the loan
  • the length of time for which it was outstanding
  • whether it was a repeated or an isolated offence
  • the way in which it came to light.

Normally concealment of the loan in debtors would reduce the abatement by 5% - 10%.

Cases involving incorrect accounts (or an omission from a CTSA return) will generally be more serious than failure to notify and a lower abatement for gravity would be expected. If the incorrect accounts or omission from the return relates to a period beginning on or after 1 April 2008 and has a filing date on or after 1 April 2009, you must refer to the guidance at CH82400+ when you are calculating the amount of the penalty due under FA07/SCH24. ‘Bed and breakfasting’ S455 or S464A liability EM8565 is regarded as submitting incorrect accounts.

The penalty is based on the Section 455 or Section S464A tax for which the company is liable (TMA70/S10 (2)), gross tax before allowing any relief under Section 458 or Section 464B. This applies even where the loan is repaid within 12 months of the end of the accounting period but, in practice, you should seek a low penalty in such cases. No Section 455 or Section 464A tax arises for a loan made or a benefit conferred in an accounting period ended on or after 31 March 1996 that is repaid within 9 months of the end of the accounting period in which the loan was made.

Using the guidelines above, you should try to settle cases by freely and openly discussing penalty abatement.