2013 Budget: close company loans to participators rules tightened

Practical Law UK Legal Update 3-525-3175 (Approx. 5 pages)

2013 Budget: close company loans to participators rules tightened

by PLC Share Schemes & Incentives

Loans to participators: background

Under Chapter 3 of Part 10 of the Corporation Tax Act 2010 (CTA 2010), a corporation tax charge is imposed if a close company makes a loan or advances money to a "relevant person" in the company (being a participator in the close company or an associate of a participator).

A participator is defined in section 454 of CTA 2010, and includes any person who has a share or interest in the capital or income of the close company, including loans creditors, and persons entitled to acquire such a share or interest at a future date.

The tax charge is payable by the company, and applies in relation to a loan or advance that remains outstanding after the end of the period of 9 months following the end of the accounting period of the company in which the loan or advance was made. The tax charge is equal to 25% of the amount of the loan or advance outstanding at that date.

If a loan or advance is written off by the company or repaid by the recipient, the company is entitled to claim relief from the tax charge for the amount written off or repaid.

For more information, see Practice note, Loans to employees and directors: tax issues: Loans to participators: close company tax issues.

Loans to participators: amendments to section 455 CTA 2010

In the 2013 Budget, the Chancellor announced draft legislation to close three loopholes reportedly being used by close companies to avoid the tax charge on loans to participators.

The draft legislation to amend section 455 of CTA 2010 will be published in Finance Bill 2013 on 28 March 2013, and will apply to all loans made on or after 20 March 2013.

Payments through intermediaries

There are two proposed amendments to the scope of the charge on loans or advances made to relevant persons. HMRC's technical note on the proposals explains that there are two specific avoidance arrangements that the proposed changes will combat:

Loans to partnerships (including limited liability partnerships) in which a participator (or an associate of a participator) is a partner.
Loans to trusts where one or more of the trustees or potential beneficiaries is a participator (or an associate of a participator).

There will be exceptions to the extended scope of the charge, for example for loans made in the ordinary course of a credit business. The provisions giving relief for loans written off or repaid will apply in the normal way.

Other transfers of value to a participator

HMRC's technical note on the proposals explains that some companies have been seeking to avoid the loans to participators charge by transferring value to participators in other ways. The example given in the technical note is of an LLP formed by the participator and the close company. If the close company makes a contribution to the LLP, or leaves profits undrawn in the LLP, amounts drawn down from the LLP by the participator are not loans or advances made by the company to the participator.

Part 10 of CTA 2010 will be amended to include a new charge on any arrangements under which value is extracted from a close company and the benefit is conferred (directly or indirectly) on a participator (or an associate of a participator). If the transfer of value is not already subject to section 455 of CTA 2010, or otherwise chargeable as income of the participator, a tax charge equal to 25% of the value transferred will be payable by the company at the end of the period of 9 months following the end of the company's accounting period in which the transfer was made.

Relief will be available if the value is returned by the participator for no consideration.

Relief only for genuine repayments

HMRC's technical note on the proposed draft legislation explains that some companies have been exploiting the provisions on section 458 of CTA 2010. These allow the company to claim relief for loans or advances written off or repaid. In particular, HMRC wishes to prevent companies from claiming relief where a loan is repaid (or partly repaid either:

Immediately before the end of the 9 month period from the end of the accounting period in which it was made, avoiding a charge under section 455 of CTA 2010, and a loan, advance or transfer of value of same (or a larger amount) is made to the participator immediately.
Immediately after a tax charge under section 455 has been paid, enabling the company to make a claim for relief, and a loan, advance or transfer of value of same (or a larger amount) is made to the participator immediately.

Part 10 of CTA 2010 will be amended to introduce a "bed and breakfasting" rule for claiming relief under section 458 of CTA 2010, 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. Relief will also not apply 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).

Review of loans to participators rules

The 2013 Budget also included a statement that the government will carry out a review of the close company loans to participators rules and will issue a consultation document on the review later in 2013 (see Overview, paragraph 2.44).

Sources

HMRC: 2013 Budget: Technical note, Close company loans to participators.

2013 Budget, Overview of tax legislation and rates, paragraphs 1.63 and 2.44.

2013 Budget, Tax Information and Impact Note, Loans from close companies to their participators.

Finance Bill 2013, clause 76 and Schedule 28.

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