The ‘bed and breakfasting’ trap

Jennifer Adams outlines the tax implications of an overdrawn director’s loan account at the end of an accounting period, and anti-avoidance rules designed to prevent misuse. At the end of the accounting period, it is not unusual to find that a director and shareholder of a closely-controlled company has overdrawn their directors’ loan account, resulting in a debit balance owed back to the company, with the ‘loan’ remaining unpaid.

The ‘section 455’ charge

Where a loan to a director or participator is not repaid within nine months and one day after the accounting period end, the company becomes liable for a temporary tax charge of 33.75% (CTA 2010, s 455). It is a temporary charge as, once the loan is repaid, HMRC will refund the tax, albeit with a further nine-month lag after the end of the accounting period of repayment.

In specific circumstances, the director may also face income tax and National Insurance contributions charges under the PAYE benefit-in-kind rules. The charge technically applies each time a loan is made but, in practice it is only necessary to consider loans outstanding at the accounting period end.

‘Bed and breakfast’ trap

If the loan cannot be repaid in time, an obvious ‘workaround’ would be to repay just before the deadline and withdraw similar funds shortly afterwards. This is known as the ‘bed and breakfasting’ trap, and falling into it can be a costly mistake unless planned carefully.

‘Matching’: 30-day rule

To combat this, HMRC introduced the ‘30-day rule’. Under this anti-avoidance rule, the repayment is treated as ineffective should a director or participator repay £5,000 or more within the nine-month window, then withdraw a further £5,000 or more within 30 days. Broadly, HMRC will look through the repayment as though it never happened, applying the charge to the lower of the amount repaid and re-borrowed. Importantly, this rule applies even if the transactions fall within different accounting periods.

Matching: ‘motive’ test

The rules go further and critically, there is no 30- day time limit under these provisions. Even where a director waits more than 30 days before re- borrowing, HMRC can invoke an ‘arrangements’ rule where, at the time of repayment, there are arrangements or an intention to withdraw funds again. If HMRC can demonstrate that the repayment was always intended as a temporary measure, the charge will apply in full.

The term ‘arrangements’ is not defined in the legislation and is interpreted broadly. A repeated pattern of repayment and re-borrowing, particularly around the nine-month deadline, may constitute strong circumstantial evidence. In practice, HMRC will consider the overall pattern of behaviour, making contemporaneous documentation and a clear commercial rationale important where timing appears tax-driven.

Another anti-avoidance provision applies where the outstanding loan is at least £15,000. Here, repayments may be matched with subsequent borrowings of at least £5,000 where, at the time of repayment, there were arrangements or an intention to re-borrow and one of the main purposes is to avoid the tax charge.

Practical tips

• If the loan is not repaid on time and the company is unable to pay a dividend or bonus, changing the company’s financial year end could be a consideration. Changing to a date before the money was borrowed allows the charge to be deferred, as no loan would have existed at that (revised) accounting period end. Note Companies House rules on changing a company’s year-end, which must be adhered to.

• For a higher-rate taxpayer in 2026/27, the dividend tax rate (35.75%) and the section 455 rate (35.75%) are identical, so there is no tax advantage in repaying via a dividend — the benefit would come from the timing (having an interest-free loan and deferring the tax charge). For an additional rate taxpayer, dividends at 39.35% are more expensive than section 455 at 35.75%.

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.