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Business Services  •  Business Tax  •  Corporate Taxation  •  HMRC  •  Personal tax  •  Small Business  •  Tax Planning  •  Taxation

Tax planning loophole of company loans is closed by HMRC

By RJP LLP on 19 June, 2013

One of the benefits of having a limited company is the flexibility it offers to shareholders and owner directors in how to take remuneration and dividends. In addition, some company owners choose to shelter a large proportion of profits inside the company, rather than incur additional taxation by withdrawing money which is surplus to their personal requirements. If larger personal funds are required for a period of time, a tax planning strategy for shareholders has been for companies to provide them with tax efficient access to retained profits by granting a company loan. Provided the loan is repaid in full 9 months after the end of the company’s accounting year-end, and HMRC’s official rate of interest is paid by the borrower, no tax is due. If the loan remains outstanding 9 months after the company’s accounting year-end however, a tax charge of 25% is made on the company, which becomes repayable only once the loan is repaid.

HMRC has recently announced changes to the legislation governing such company loan arrangements, in order to prevent manipulation. There are therefore a series of new restrictions to be aware of.

These restrictions are specifically aimed at ‘close companies’, i.e. those companies that are controlled by five or fewer shareholders or those that are controlled entirely by shareholder directors. Most owner managed companies –i.e. those that are most likely to have provided company loans - fall into this category. In its technical briefing notes on this subject, HMRC stated that the new legislation was introduced with immediate effect from March 2013 to “deter close companies from transferring value from the company to individuals who have an interest or shares in the company (participators) in ways which are not chargeable to tax as remuneration or dividends.”

Now, according to the new rules governing the use of loan arrangements by close companies, additional tax may be payable by any company which has approved a loan to its participators (shareholders or individuals with a financial interest in the company). Family members who are not participators are regarded as ‘associates’ and loans to them are also caught.

The new legislation has clearly been created to close what HMRC has described as a commonly used tax avoidance loophole. It covers the following scenarios:

  • Loans made through an intermediary entity (company) to a partnership or trust. These now face restrictions - for example, Company X and its participators create a partnership X LLP for tax planning purposes. A loan is made from Company X to X LLP. This is now treated as a loan made directly to participators and is taxed accordingly. The rules also cover loans made to a trust from a company in which the trustees or their associates are participators. This also extends to employee benefit trusts.
  • Early repayment of loans followed by a re-loan of company funds to avoid the 25% tax charge – i.e. repaying the loan before the nine month cut off point to avoid the tax charge and then commencing a new loan agreement shortly afterwards. This practice is now restricted by detailed rules which ensure the original loan is deemed not to have been repaid and the tax charge will automatically apply.
  • Any loans written off continue to be liable to the tax charge as before.

 

The changes to HMRC’s treatment of close company loans is complex, as outlined in their technical briefing notes. It is important to seek specialist tax planning advice if you are concerned these rules will apply to you. Please contact Lesley Stalker for further details by emailing las@rjp.co.uk

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