If you’ve ever taken a director’s loan from your company, even temporarily, you may assume it’s simply a matter of repaying it or clearing the books. But there’s a tax sting many director’s overlook. It’s found in Section 455 of the Corporation Tax Act 2010.
This lesser-known provision creates a tax liability on outstanding director loans. It applies before liquidation, which means your company may owe tax even if it later collapses. You may also still be pursued by HMRC.
In this blog, we’ll explore how Section 455 works, when it applies, and how directors can find themselves personally entangled in a tax liability they didn’t expect.
What Is Section 455 CTA 2010?
Section 455 imposes a 32.5% tax charge on loans made by a close company (typically one controlled by five or fewer shareholders) to its directors or participators if the loan is not repaid within nine months of the company’s financial year-end.
This tax is payable by the company, not the individual, but it creates immediate cash flow consequences and can prompt further scrutiny by HMRC.
While it may be refundable later, that refund depends on the loan being repaid. That may never happen if the company enters insolvency.
When and How Does the Charge Apply?
Here’s a typical timeline:
- Director withdraws funds from the company that are not recorded as salary or dividend
- Loan remains unpaid nine months after the accounting period ends
- Company must pay 32.5% of the outstanding loan amount to HMRC under Section 455
- If the loan is repaid later, HMRC may refund the tax, but only after a claim is made
If the company becomes insolvent, it may never be able to reclaim the tax. This means the charge effectively becomes a real, permanent loss and a red flag for investigators.
What Happens in Insolvency?
In the event of liquidation or administration:
- The Section 455 charge still applies if the loan was overdue at the time the company became insolvent
- HMRC becomes a creditor in the liquidation process
- Liquidators may treat the director loan as an asset of the company and pursue repayment
- HMRC may look for evidence of misconduct, especially if the loan was substantial or frequent
If HMRC believes the loan was used to extract profit without paying tax, it may trigger not just enforcement but a deeper investigation into the director’s conduct.
Why This Matters for Directors Personally
While Section 455 is technically a company tax, the existence of an overdrawn loan can result in:
- Pressure from liquidators to repay the loan in full to recover value for HMRC and other creditors
- Increased risk of misfeasance claims, especially if the loan appears excessive or undocumented
- Potential disqualification if the director is seen to have abused their position for personal gain
- HMRC scrutiny into benefit-in-kind reporting, PAYE compliance or disguised remuneration
Many directors believe that loan withdrawals are harmless, especially if the business is otherwise healthy at the time. But if the company collapses before the loan is repaid, the consequences can be severe and long-lasting.
Can the Tax Be Avoided?
There are only a few legitimate ways to avoid the Section 455 charge:
- Repay the loan in full within 9 months of year-end
- Declare it as salary or a dividend and pay the appropriate tax and National Insurance
- Offset it against expenses or funds introduced if justified and properly recorded
- Ensure accurate classification from the outset to avoid misinterpretation
Attempts to repay and redraw the loan shortly after, known as ‘bed and breakfasting,’ have been targeted by anti-avoidance rules, especially if the amounts exceed £15,000.
Case Example: The Tax That Couldn’t Be Claimed Back
In a recent case, a sole director withdrew £45,000 over 18 months without formal classification. The company failed six months later, and the loan remained on the books. As the loan was outstanding past the nine-month window, a Section 455 charge of £14,625 applied and was paid just before cash flow dried up.
The company never recovered. The liquidator pursued the loan, and HMRC became an unsecured creditor for the tax, which was never refunded. Meanwhile, the director faced a misfeasance claim and scrutiny over PAYE failures.
Section 455 is often misunderstood or overlooked, but it has real implications for both the company and the individual director. If your company has outstanding loans to you or other participators, the tax consequences can emerge long before liquidation.
At IL Advisory, we help directors facing loan account claims, tax complications and personal exposure in failing companies. Understanding your position early could prevent costly surprises later.
Concerned About Director Loans or Section 455?
We help directors:
- Review outstanding loans and tax risk
- Respond to liquidator or HMRC demands
- Negotiate settlements and protect against escalation
- Avoid unnecessary exposure and disqualification
Call 020 7692 8456
Email info@iladvisory.co.uk