Legislation was introduced in the finance Bill 2013 to counter arrangements whereby close companies seek to avoid the charge to tax under section 455 on loans to participators. This will affect small companies where loans are made to directors who are also shareholders (participators) such as overdrawn director’s current accounts.
A close company is a company which is controlled by five or fewer participators or any number of directors who are participators and broadly, a participator is a person who has a share or interest in a company.
If a loan is made to a director/shareholder of a close company and is outstanding at the end of the company’s accounting period then under section 455 (of CTA2010) a charge to tax arises equivalent to 25% of the outstanding loan or advance. The tax is payable with company’s corporation tax charge nine months after the year end.
If the loan or advance is repaid or released within nine months after the end of the company’s accounting period end then tax relief is available under section 458 (of CTA2010) which means that the tax charge is not payable.
If tax is paid on the loan and the loan is later repaid then the tax paid can be recovered.
One of the tax avoidance measures affecting these arrangements relates to situations where close companies have been able to exploit the tax relief when the loan is repaid to the company. Where a loan from a close company to a participator (director/shareholder) is repaid within nine months after the end of the company’s year end to avoid the section 455 tax charge and shortly after a new loan is made available (known as bed and breakfasting) then new rules contain specific provisions to deny this tax relief as detailed below.
With effect from 20 March 2013 there is a "bed and breakfasting" rule for claiming relief under section 458 , whereby if a loan, advance or transfer of value of £5,000 or more is made to the participator within 30 days of a loan or advance of £5,000 or more being repaid by that participator, relief will not apply and the tax charge will become payable.
In addition even if the 30 day rule does not apply to deny tax relief, relief will be denied where, prior to a loan or advance being repaid by a participator, that participator owes the company £15,000 or more and after that repayment, pursuant to arrangements in place at the time of the repayment, the company makes a loan, advance or transfer of value to the participator (or an associated person).
There were two other measures introduced to tackle avoidance of the tax charge (known as s455 tax) on loans from close companies to their participators and these were:
• to put beyond doubt that loans to various intermediaries are within the scope of the charge;
• transfers of value (other than loans) are brought within the scope of the charge when arrangements mean there is also a corresponding receipt of value by the participator.
These can be reviewed in more detail at HMRC - new rules close company loans
Please contact us for further advice on these type of loan arrangements.
