HMRC Says My Director’s Loan Account Is Taxable: How Do I Challenge the Charge?

If HMRC says your director’s loan account is taxable, it is usually saying that your company lent you money, or let you take it, and was not repaid in time. For a close company, the company then owes section 455 tax at 33.75% of the outstanding balance, or 35.75% on loans made from 6 April 2026. HMRC’s figure is not always right: some balances are not loans, some have been repaid, and some come from bookkeeping errors.

Directors often discover the problem in a letter after HMRC has read the company’s return, and interest may already be running. How you respond affects whether the charge stands, is reduced or is removed. Our guide to HMRC compliance checks and how to respond covers the general process.

What HMRC Is Charging

Section 455 of the Corporation Tax Act 2010 charges a close company on loans and advances to its participators and their associates, who include close relatives, partners and some trustees. The company, not you, pays the charge, which is shown on the company’s return and supplementary page CT600A. The rate follows the dividend upper rate: 33.75% for loans made on or after 6 April 2022 and 35.75% for loans made on or after 6 April 2026. The tax is due nine months and one day after the end of the accounting period in which the loan was made. Our guide to overdrawn director loan accounts explains how the same balance is treated if the company later fails.

The charge is temporary. If the loan is repaid, released or written off, the company can claim relief under section 458 against the original charge. The claim must be made within four years of the end of the financial year in which the repayment, release or write off took place. A company that misses the claim may need to correct its return, and our guide to voluntary disclosure to HMRC explains how HMRC treats corrections.

HMRC may also look at charges that sit alongside section 455. A loan over £10,000 that carries no interest, or interest below HMRC’s official rate (3.75% for 2025/26), can create a taxable benefit for the director, reported on form P11D, with Class 1A National Insurance for the company. If a loan is released or written off, the amount is added to the borrower’s income under section 415 of the Income Tax (Trading and Other Income) Act 2005, and overlapping rules can apply to a director who is also an employee. See also our guide to repaying director loans before insolvency.

Find Out Exactly What HMRC Is Relying On

Before arguing the law, establish which year HMRC is looking at, which transactions it has treated as loans and how it reached its figure. Ask for the workings in writing if the letter does not give them. Our guides to how much you must disclose to HMRC and to Schedule 36 notices set out what HMRC can demand and what you can question.

The type of letter matters too. An enquiry into the company’s return, a discovery assessment for an earlier year and a request to explain a balance each follow a different process with different deadlines. Our page on understanding HMRC letters will help you tell them apart.

Six Grounds on Which the Charge Can Be Challenged

It was not a loan. Money taken from a company can be salary, a dividend, an expense reimbursement or the return of money you had put into the company. A dividend can only be paid out of profits available for distribution, and HMRC will look for the minutes and accounts that support it. If you paid company costs personally, those sums can be set against what you owe. If HMRC will not accept the explanation, you can ask for an internal review.

You are not a participator. Section 455 applies only to a close company and only to loans to participators and their associates. A participator is anyone with a share or interest in the company’s capital or income, which includes shareholders, loan creditors and people entitled to share in distributions. A director with none of those rights is not clearly caught, but being the spouse, civil partner, parent, child or sibling of a shareholder makes you an associate, and loans to associates are caught. HMRC tests this in an HMRC tax investigation, so check your position early.

An exception applies. Under section 456, a loan to a director or employee is outside the charge if the total outstanding does not exceed £15,000, the borrower works full time for the company (at least three quarters of normal working hours) and has no material interest in it. Loans made in the ordinary course of a money lending business are also excluded. The protection is lost if you acquire a material interest while the loan is outstanding. HMRC can ask for evidence of hours and shareholdings under its information powers.

The loan was repaid in time. If the loan was repaid before the tax fell due, the company claims relief on page CT600A and no tax is payable on it. Check that repayments were credited to the right account and the right year. Where an adviser’s bookkeeping error caused a misposting, our guide to claims for negligent tax advice explains whether you can recover the cost.

The figures are wrong. Unrecorded director contributions, misposted expenses and journals entered after the event can all distort a loan account. Rebuilding it from bank statements sometimes gives a different result from the company’s software. Reports an accountant prepares for this exercise may not be protected by privilege, as our article on accountants’ reports and privilege explains.

HMRC is out of time. The ordinary limit for assessing a company is four years from the end of the accounting period. It extends to six years where the loss of tax was careless and to 20 years where it was deliberate, under paragraph 46 of Schedule 18 to the Finance Act 1998.

Bed and Breakfasting: The Rule That Catches Careful Directors

Repaying a loan before the deadline and borrowing again shortly afterwards does not necessarily remove the charge. Section 464ZA of the Corporation Tax Act 2010 contains two rules. The 30 day rule applies where, within any 30 day period, repayments total £5,000 or more and new loans total £5,000 or more. The repayments are then matched to the new loans, so relief under section 458 is restricted and the earlier loan remains chargeable to that extent. The arrangements rule applies where £15,000 or more is outstanding at the time of a repayment and arrangements exist for at least £5,000 of new loans. HMRC regards “arrangements” as having a wide meaning, and they can be made by the director, the company or a third party. Officers handling these cases look at the pattern across tax investigations, so the timing of every repayment matters.

These rules turn on documents such as board minutes, bank statements and emails around the repayment. If HMRC has applied them, ask for its reasoning and test whether the facts support it. HMRC can require the underlying records through its information requests, so keep them.

Claiming Relief You Have Not Yet Claimed

If the loan has been repaid, released or written off since the charge arose, the company claims relief under section 458 in its return or by amending it. Once the time for amending has passed, the claim is made outside the return under Schedule 1A to the Taxes Management Act 1970. Relief is given against the original charge. If four years have passed from the end of the financial year of repayment, the statutory right to claim has ended, so check the date of every repayment. A review of historic loans can sometimes find relief that was never claimed, and our voluntary disclosure guide explains how to put the company’s returns right.

How the Challenge Works in Practice

HMRC opens an enquiry into a company’s return by notice under paragraph 24 of Schedule 18 to the Finance Act 1998. The enquiry ends with a closure notice under paragraph 32, which states HMRC’s conclusions and, where it disagrees with the return, amends it. If the enquiry drags on, the company can apply to the First-tier Tribunal under paragraph 33 for a direction that HMRC issues a closure notice, and the tribunal must give it unless HMRC shows reasonable grounds for not doing so. Where HMRC believes tax was missed in an earlier year, it may issue a discovery assessment instead, and our guide to discovery assessments explains the conditions it must meet.

The company appeals against an amendment made by a closure notice under paragraph 34, and notice of appeal must be given within 30 days after the amendment was notified to it. The appeal is made by the company, not by you personally. You can ask for an internal review, try alternative dispute resolution or take the case to the First-tier Tax Tribunal. If a deadline has passed, our guide on late appeals explains whether you can still proceed. Whether disputed tax must be paid before the appeal is decided depends on the decision, and our guide to paying now and appealing later sets out the position.

Penalties and Interest

If a company return understated the section 455 charge, the standard penalty for an inaccurate return is 30% of the extra tax for carelessness, 70% for deliberate errors and 100% where the error was deliberate and concealed, before reductions for disclosure and co-operation. For a deliberate inaccuracy, HMRC can also recover the company’s penalty from an officer of the company under paragraph 19 of Schedule 24 to the Finance Act 2007. Late payment interest runs from the due date until the tax is paid or the loan is repaid, released or written off. Our guides to careless, deliberate and concealed behaviour and HMRC penalties explain the arguments. The behaviour finding also affects how far back HMRC can go.

Mistakes That Make the Position Worse

Do not backdate dividend minutes, rewrite journals or change the loan account after HMRC has written. Altered records can lead HMRC to treat a careless error as deliberate. Do not move money between the company and personal accounts to reduce the balance without advice, because that is where the bed and breakfasting rules apply. Do not attend an HMRC meeting unprepared, and read our page on HMRC interviews first if one is proposed.

If the Company Cannot Pay

An unpaid section 455 bill is a company debt, and HMRC can enforce it like any other. Our guide to time to pay arrangements explains how to ask for instalments. If HMRC threatens a petition, see our guidance on HMRC winding up petitions and on HMRC enforcement becoming insolvency action.

When the Advice Was Wrong

If an accountant told you that you could draw money as a loan without tax, failed to warn you about the nine month deadline or missed a section 458 claim, the interest, penalties and lost relief may be recoverable from them. Our guides to compensation from negligent accountants and tax advisers and to whether directors can sue professional advisers explain the claim. Limitation periods apply, so keep the engagement letter and emails.

How We Can Help

We act for company directors facing HMRC charges on director’s loan accounts. We review the letter and the accounts, rebuild the loan account from bank records, identify which transactions were not loans, claim repayment relief where it has been missed, challenge the behaviour category and penalty, and appeal to the tribunal where HMRC’s figures are wrong. We deal with HMRC directly so the correspondence comes to us. We do not offer free legal advice or legal aid, and we generally take on substantial matters. More on our tax work is on our taxation solicitors page.