Are dividends credited to an overdrawn director’s loan account exempt from the ‘bed and breakfast’ anti-avoidance rules for loans to participators? For example, if a director’s loan account (DLA) is overdrawn at the year-end and then in the following nine months the following occurs:  

• Cash of £30,000 in total is withdrawn in £1,000 or £2,000 increments over the nine months and debited to the DLA;  
• Interim dividend of £30,000 is declared before the nine months is up. Can this dividend be treated as repayment of £30,000 of the previous year-end overdrawn DLA? So my question is, has the £30,000 dividend ‘been paid out in cash’ or is it only ‘paid out in cash’ if is actually paid when declared? 

Arthur Weller replies:  

If you look at HMRC's Company Taxation manual it states: ‘This legislation (i.e. bed and breakfasting) does not apply where the repayment itself gives rise to a charge to income tax on the participator or associate to whom the original loan was made. This could happen, for example, where the loan is repaid by means of a dividend credited to the loan account which is included as income on the recipient’s tax return’. It would appear that although repayments in the later accounting period are in many circumstances matched with borrowings in the later accounting period, and not credited as repayments of the loans in the previous accounting period, this bed and breakfasting legislation does not apply when the lending company (see there) pays a taxable dividend to the borrowing shareholder. See there about the dividend actually being physically paid to the individual.