Ask an expert: Is this loan a ‘chargeable payment’?

Question

My client company effected a statutory direct demerger under CTA 2010 s 1076, after which the original shareholders owned the demerged company. About a year later, the demerged company made a loan to a trading partnership in which the shareholders were partners (a loan to participators under CTA 2010 s 455), which was not contemplated at the date of the demerger clearance application and was therefore not mentioned in the application. Could the loan be caught as a ‘chargeable payment’ within the meaning of CTA 2010 s 1088, as it was made within five years of the demerger?

Answer

As HMRC notes in its Company Taxation Manual: ‘Even though the Board may have given clearance for a demerger, the demerger may later be exploited for avoidance.’

The ‘chargeable payments’ rules in CTA 2010 ss 1086–1090 are therefore anti-avoidance measures to prevent a statutory demerger being exploited in the five years after the demerger takes place.

CTA 2010 s 1088 (and s 1089 in the case of unquoted companies) states that payments are ‘chargeable payments’ for these purposes if they meet certain conditions.

HMRC further states at CTM17290 that chargeable payments are, broadly, payments of any kind by a company to its members, directly or indirectly, which are money payments or the transfer of money’s worth.

I assume that your client company was unquoted, in which case CTA 2010 s 1089 states that a payment will be chargeable if it is made in pursuance of a scheme or arrangement made with the company or, if the company is directly or indirectly controlled by five or fewer persons, with any of those participators, and each of the following conditions are met:

the payment is made in connection with the shares of the company making the payment, or the shares in any company concerned in the exempt distribution, or in connection with any transaction affecting such shares;

• the payment is not made for genuine commercial reasons or forms part of a tax avoidance scheme; and
• the payment (if made by a company) is not a distribution or an exempt distribution, and is not made to a company in the same group.

How does this affect your client?

It will be noted that loans are not specifically mentioned, but if the loan was made for a genuine commercial reason and was not part of a tax avoidance scheme, it would not meet the second condition, and would therefore not constitute a chargeable payment for that reason alone.

It is also unlikely that the loan could be said to be made ‘in connection with the shares of the company’, in contrast, for example, to payments such as a repayment of share capital or a purchase of own shares.

It can also therefore be concluded that the first condition was not met and that the loan is therefore not a chargeable payment.

(However, if the loan had been contemplated but not mentioned in the clearance application, HMRC could subsequently regard the clearance given as invalid, as a relevant fact had not been disclosed.)

Clearance can also be sought under CTA 2010 s 1092 in advance of making a payment following a demerger. I take it that this was not done on this occasion, but clearance should always be obtained if there is any doubt over whether a proposed payment might be caught.