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FB 2013: Close company loans to participators

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A tax charge arises under CTA 2010 s 455 where a company makes a loan to a participator and the loan is not repaid within nine months of the year end. Finance (No.2) Bill 2013 introduces new provisions to extend this charge to situations where certain loans or other arrangements benefiting participators have been facilitated by companies, including loans to partnerships or trusts in which the participator has an interest. Provisions have also been introduced to catch bed and breakfasting and similar arrangements that prevent a s 455 charge from arising on loans that are effectively ongoing. These changes are effective from 20 March 2013.

Practitioners will be familiar with the tax charge which arises under CTA 2010 s 455 when loans are made from close companies to their shareholders. It is common practice for these loans to be run up throughout the year and be cleared shortly after the year end by way of a dividend or bonus. However, there are instances where the loans are temporarily repaid and Finance (No.2) Bill 2013 contains provisions to prevent relief from the s 455 charge in these circumstances. Also, there are provisions to extend the loan to participator rules, to put it beyond doubt that a charge arises where there is a transfer of value to participators or where loans are made to an intermediary and the shareholder can benefit. This article considers both the existing and the new provisions.

When does a charge arise?

A charge arises under s 455 where a loan or advance is made by a close company to a participator or an associate of a participator and the amount remains outstanding nine months and one day after the end of the accounting period.

What is a close company?

A close company is defined in CTA 2010 s 439 as one which is controlled by ‘five or fewer participators’ or ‘participators who are directors’. Interests of associates are attributable for this purpose.

CTA 2010 s 442 specifically excludes non-UK resident companies. Certain exclusions also apply where participators include a non-close company (CTA 2010 s444).

  • Control: CTA 2010 s 450 defines ‘control’ as being able to exercise ‘direct or indirect control’ over a company’s affairs. This can be on the basis of share capital, votes or distribution rights.
  • Participator: CTA 2010 s 454 defines a ‘participator’ as ‘a person having a share or interest in the capital or income of the company’.
  • Associate: CTA 2010 s 448 defines an ‘associate’. The categories include relatives and partners of the participator and trustees of family settlements.

Therefore, most family companies will be close companies but so will many others.

Tax treatment of a loan: company

A loan by a close company (or one of its subsidiaries) to a participator or an associate will be subject to a tax charge of 25% under s 455 where it remains outstanding nine months and one day after its year end. This includes loans by subsidiaries of the company (CTA 2010 s 460), as well as those treated as linked under CTA 2010 s 459.

A refund is given once the loan is repaid or released (CTA 2010 s 458) and must be claimed within four years of the relevant period. A delay will always occur however between discharge and refund, as the earliest a refund will be made is nine months after the relevant period.

For multiple loans, earlier loans are treated as being repaid first unless another order is agreed.

Tax treatment of a loan: participator but not employee

A participator who is not also an employee (nor becomes an employee) will not incur a tax charge during the life of the loan. A charge will only arise if all or part of the loan is written off. The amount written off will be treated as dividend income of the participator (ITTOIA 2005 s 415).

Tax treatment of a loan: participator also employee

The position for a participator who is also an employee is slightly different. Where the loan exceeds £5,000 at any point in a particular tax year, a benefit in kind will arise on a notional interest charge. This will be based on HMRC’s official rate, less the amount of any interest paid by the employee.

The release of a loan to an employee is, however, treated for income tax purposes in the way as for a non-employee participator. Though the release is within the definition of employment income under general principles, the charge as a dividend takes precedence (HMRC’s Company Taxation Manual CTM 61630 and ITEPA 2003 s 189). However, HMRC may contend that there is a liability to class 1 NIC.

Loans to partnerships (pre 20 March 2013)

A loan to a partnership is treated as a loan to the individual partners for the purposes of CTA 2010 s 455. A charge can therefore arise if one of the partners is also a participator.

The exception to this is a loan to a Scottish partnership, as this is a separate legal entity. Such loans do not fall within s 455 but HMRC notes in its manuals (CTM 61515) that loans can be caught where no genuine commercial arrangements exist. HMRC may also try to invoke the linked loans provisions noted above on payments made to partners.

There is, however, no such distinction for a loan to LLPs. Such loans are treated as being made to the individual partners.

Where a company makes a loan to a partnership in which it is a member, s 455 does not usually apply unless HMRC successfully contends that the arrangement is not genuine or invoke the linked loans provisions.

Reporting requirements: company

Loans outstanding at a company’s year end are reportable on its corporation tax return on form CT600A. Similarly, claims for refunds can be made on the return. A separate claim is required, though, when it is made after the date, a return can be amended.

Reporting requirements: employees

Benefits in kind assessable on employees are reportable on Form P11D for the relevant tax year. A benefit arises when interest is paid at less than the official rate.


There is an exception to the charge for loans made in the usual course of a company’s lending business, and loans to employees of less than £15,000 where, broadly, the employee works full time and has an interest of not more than 5%.

The changes included in Finance (No. 2) Bill 2013

With effect from 20 March 2013, the rules relating to loans to participators have been tightened. At the same time, the government also announced its intention to undertake a wider review of the loans to participators regime and a consultation paper will be published later this year.

The loan to participator rules have been extended so that it is put beyond doubt that a charge arises where there is a transfer of value to participators or where loans are made to an intermediary. Also, specific rules have been introduced to catch situations where loans are repaid to the company before the time when the s 455 charge would have arisen and a new loan is made shortly afterwards. These new rules are set out in Finance (No.2) Bill 2013 Sch 28.

Loans to intermediaries

A charge under s 455 previously applied where a loan or advance was made to a relevant person. A relevant person was defined in s 455(1) to include individuals and companies receiving a loan or advance in a fiduciary or representative capacity. In recent years, companies have used trust and partnerships in structures so as to avoid a s 455 charge, while the participators still had the benefit or use of the funds.

If, for example, prior to 20 March 2013, a close company made a loan to a partnership in which all the partners were individuals and one of the partners is a participator (or an associate of a participator), HMRC would argue that there was a loan to a participator so that s 455(1) applied. However, where the partners were not all individuals, the loan was not caught as it was not to a relevant person, i.e. individuals.

Section 455(1) has been extended and now applies to:

  • trustees of a settlement where one or more of the trustees or beneficiaries (actual or potential) is a participator or an associate of a participator in the company; and
  • an LLP or other partnership where one or more of the individuals is a participator in the company or an associate of the participator.

This extension is to ‘put beyond doubt’ that these arrangements are caught by the s 455 provisions. See example 1.

Before this legislation was introduced, there was doubt about the application of s 455 to loans to a partnership whose members include the company itself. Where genuine partnership arrangements exist, it was difficult for HMRC to contend that the loan was caught under s 455. However, if the loan was drawn out by the individual from the partnership, HMRC applied s 459 so that a charge arose. This would be the case if the participator partner is also overdrawn on his own account with the partnership.

Where the loan is repaid, relief will be available if the loan is repaid before the due and payable date (nine months and one day from the end of the accounting period). The usual exceptions also apply so that loans which are made in the ordinary course of a money lending business are not caught.

These changes apply to loans or advance made on or after 20 March 2013. It may be worth considering isolating pre 20 March loans and issuing any new loans on different terms in a different account, e.g. secured or unsecured.

Transfers of values which are not loans or advances

The above structures have also been used to transfer value to participators without providing an advance or a loan. See examples 2 and 3.

The purpose of these changes is to catch other extractions of value by participators, such as capital contributions made by the company to an LLP where the participators are also members of the LLP.

For s 464A to apply, there are two main conditions which must be present.

  • a tax avoidance purpose, i.e. where the main purpose or one of the main purposes is to avoid, reduce or obtain relief from a charge under s 455 or to obtain a tax advantage for the participator or associate; and
  • conferral of a benefit on a participator or an associate of a participator.

Section 464A is widely drafted and, in the absence of clearance from HMRC to the contrary, it would be prudent to assume that it will apply to the transactions of this nature.

Bed and breakfasting

There are two restrictions on relief under s 458 and s 464B, which have been introduced to prevent a repayment of tax arising under s 455 or s 464A, where loans effectively remain outstanding beyond the nine month window.

The first is where a company has made a loan of more than £5,000 on which a s 455 charge arises (a ‘chargeable payment’), repayments totalling more than £5,000 are made, and within a 30 day period new loans of more than £5,000 are made, the repayment is ignored (in whole or in part) for s 455 purposes.

Relief is denied on the lower of the amount repaid, and the amount of the new chargeable payment made by the company. The restriction does not apply where repayment is chargeable to income tax, for example where a dividend is used to repay the loan. See example 4.

The second restriction applies where:

  • immediately before a repayment is made, £15,000 or more is owed to a close company in respect of one or more chargeable payments made by the company to a person;
  • at any time after the repayment is made, the close company makes a chargeable payment (‘the new payment’) to the person or an associate of the person; and
  • at the time of the repayment, any person intended that the new payment would be made, or arrangements had been made for the new payment to be made.

Relief is denied on the lower of the amount repaid and the amount redrawn. As with the 30 day rule, the restriction does not apply where a dividend, for example, is used to repay the loan.

There is no time limit on this restriction, which will catch any situation where there was an intention to draw money out of the company otherwise that by way of bonus or dividend. The objective here is clearly to enforce compliance, especially bearing in mind the introduction of RTI at the same time, which requires a greater level of attention to PAYE obligations.

This restriction is intended to catch situations where a proprietor uses company money by maintaining an overdrawn loan account on which income tax is never paid.


The loans to participator provisions have been in statute for many years, having their origin in ensuring that ACT is collected on non-dividend payments to participators. However, the provisions have been updated to take into account the increased use of corporate partnerships, and at the same time to legislate for bed and breakfasting transactions and other situations where loans effectively remain outstanding for the long term without paying tax under s 455.

The new provisions may force companies to consider the true nature of transactions with their shareholders, with the result that income tax (either on the basis of remuneration or dividends) is likely to be paid on a more timely basis on amounts withdrawn from the company.

Paula Tallon is managing partner of Gabelle LLP
Paul Howard is a director at Gabelle LLP