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February questions and answers

Newsletter issue - February 2021.

Q. My director's loan account is overdrawn as we approach our year end. Usually, a dividend is credited to cover the shortfall, but my accountant says that there are not enough reserves to do that this time. We've looked at writing off the loan to avoid a s.455 charge as a cheaper option than an additional salary payment. Are there any problems with this?

Writing off a director's loan means that you will be taxed on the amount written off as if it were a dividend. On the face of it, this is cheaper than a salary payment. However, HMRC will usually argue that the write off is really a payment "derived from an employment", meaning National Insurance also needs to be paid. The only way around this is to convince HMRC that the write-off arose due to your position as a shareholder. Expect a strong rebuff.

A better option would be to wait to see if you might be able to pay a dividend before the repayment deadline of nine months after the year end, as this will avoid the problem and the s.455 charge.

Q. I usually make regular pension contributions of approximately £10,000 per year net of relief. However, in 2017/18 I made a large one-off contribution following a capital gain. I've just realised that I omitted this from my tax return and, as a result, overpaid tax by nearly £8,000. Is there anyway I can amend the return?

The deadline for amending your 2017/18 has passed, but all is not lost. You should be able to reclaim the tax using overpayment relief as long as you do this by 5 April 2022. You need to make a claim in writing, and include the information required - set out in SACM12150.

Q. I made an investment into a promising fledgling company several years ago. Due to Covid-19, the company has struggled over the last 12 months, and has just entered administration. What is the best way to secure relief as soon as possible?

As the shares are likely to be worthless, you can explore the possibility of making a negligible value claim. If the conditions are met, this crystallises the loss on the shares now, rather than needing to wait until the shares are formally cancelled. The advantage of this is that it should secure a loss that can be offset against your general income (assuming the company is an unquoted trading company meeting the requirements), and you can carry this back to the previous tax year. For example, if you make the claim in March 2021, you will be able to amend your 2019/20 return to include the loss claim. You can read more about negligible value claims and income losses on Helpsheet 286.

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