As part of his Budget on 20 March 2013, Chancellor Osborne announced changes to the rules governing the taxation of company loans to participators. The legislation will prevent certain types of arrangement which seek to avoid the charge to tax arising under S 455 Corporation Tax Act 2012 (CTA 2010).
Essentially, the new rules deny relief where repayments and re-withdrawals are made within a short timeframe of each other using short term borrowings. The ‘perpetual’ loan arrangement will cease to be quite so attractive.
The legislation is due to be finalised in July but the new rules are effective for some transactions made on or after 20 March 2013.
Loans made before 20 March 2013
In certain circumstances, the UK imposes a tax charge (S 455 tax) on loans or advances of money made from companies to participators. The charge is equivalent to 25% of the amount of the loan or advance.
S 458 CTA 2010 provides relief in the case of a repayment or release of the loan if made between the end of the accounting period and within nine months of the end of the accounting period (payment date). The relief is automatic and the tax never becomes due or payable.
The company is required to pay this amount over to HMRC (as part of the overall tax charge) and declare all outstanding loans on the corporation tax self-assessment form.
The rules cover both loans and advances to participators and also to associates of a shareholder, such as a relative.
The new rules are aimed at tackling three types of arrangement:
- loans made to participators via intermediaries,
- transfer of value in forms which are not loans or advances of money, or
- loans repaid via ‘bed and breakfasting’
Loans via intermediaries
Currently the charge under S 455 applies where a loan or advance is made to a relevant person. Relevant person is defined to include any individuals and companies receiving a loan or advance in a fiduciary or representative capacity.
If, for example a close company makes loans to partnerships in which all the partners are individuals, we look through the partnership to the individuals.
If the partners in the partnership are a corporate acting as a partner, it has been argued that this would not be caught. In these cases, the corporate will now be charged following the proposals. The same principle will also apply to trustees.
Other extractions of value
The new rules will apply if there are any arrangements under which value is extracted from a close company and the benefit conferred on an individual who is a participator, or associate of a participator. Previous extractions via undrawn capital accounts will now be caught under these proposals.
Bed and breakfasting
The new rules are designed to deny S 455 tax relief where repayments and re-drawings are made within a short time frame of each other. It was found that in many cases, to avoid paying this tax, individuals were repaying the loan at 9 months using short term borrowings then withdrawing more money afterwards. However, because the loan was repaid on time, no tax fell due. The provisions are as follows:
- 30 day rule – where, within a 30 day period at least £5,000 is repaid to the company and this is then repaid back to the person or associate, the old loan is treated as if it had not been repaid. Consequently a tax liability falls due on the company.
- Intention or arrangement rule – in addition to the 30 day rule, where the amount of loan is £15,000 or more and either
- Arrangements are in place to withdraw any of that amount from the company or to make a new withdrawal or
- At any time after the repayment is made, a new payment is made to the participator,
then no relief is given for the tax due on the company.
It is still acceptable to declare a dividend or bonus 9 months after the year end to the equivalent value of the loan. Income tax (which includes National Insurance) will be due by both the company and the individual recipient but S 455 tax is avoided.
It is vital that all supporting documents and paperwork are in order and compliant with the legislation in order to justify the tax relief claim position.
The government has also announced its intention to undertake a wider review of the ‘loans to participators’ regime. A consultation paper relating to this wider review will be published later this year.