NEW RULES ON DIRECTOR’S LOANS
Section 455 Corporation Taxes Act 2010 imposes a 25% tax charge on any close company which makes a loan to a participator. Relief is available under Section 458 when the loan is repaid.
A close company is one that is controlled by 5 or fewer persons and their associates. Most computer/IT consultants operating through limited companies are “close companies”. A participator is broadly a person who has an interest in the capital or distributable income of the company in question. Participators withdrawing loans are usually director/shareholders or their associates, so we’ll refer to Director’s Loans throughout.
Until recently where a company advanced a directors loan, tax was charged at 25%, but only to the extent that a loan was outstanding at the end of an accounting period and had not been repaid within 9 months of the end of the accounting period. Any tax paid could be reclaimed 9 months after the end of the accounting period in which the loan was repaid.
A Limited makes its accounts up to 31st December each year. On 30th November 2012 it advanced a loan of £20,000 to its director/shareholder, A. A repaid £10,000 on 30 June 2013 and the remaining £10,000 on 31st January 2014.
Although the balance outstanding at 31st December 2012 is £20,000, this loan has reduced to £10,000 by 30th September 2013 and so A Limited pays £2500 tax under Section 455 on 1st October 2013
The loan is finally cleared in the accounting period to 31st December 2014 and so A Limited can make a claim under Section 458 for a repayment of £2500 Corporation Tax when filing its 2014 Corporation Tax return. HMRC will make this repayment on 1st October 2015.
HMRC were concerned that some director/shareholders were engaging in tax avoidance by raising funds short term to repay a loan so avoiding a charge under Section 455 and then drawing a new loan very shortly afterwards. So, in the example above, A might have withdrawn £10,000 from a credit card in June 2013 and fully repaid the loan before the tax became due. He could then have taken a second loan of £10,000 from the company in July 2013 to repay his credit card. His final repayment on 31st January would have been made within 9 months at the end of the accounting period in which the second loan was taken and so no tax will have been paid.
New anti avoidance rules take effect for loans advanced on or after 20 March 2013.
The first provision has been called Bed and Breakfasting by HMRC and is quite straight forward. If a repayment of more than £5000 is made and then a new loan is taken within 30 days, the new loan is matched with the repayment to deny relief under Section 458. So in our example, if Mr A repaid a loan of £10,000 by raising funds on a credit card he would only avoid a Section 455 charge if he left the credit card balance outstanding for at least 30 days.
The second provision is less straight forward and applies where there is a director’s loan outstanding of at least £15,000. If a repayment is made relief under Section 458 will be denied if at the time there are arrangements or an intention to withdraw a new loan at any time in the future. So if in our example Mr A had applied for a new credit card with a 0% balance transfer facility for 12 months and had used a balance transfer to repay the full £20,000 loan intending to withdraw a new loan from A Limited after 12 months to pay back the credit card, relief would be denied.
These provisions do not apply where the repayment itself gives rise to a charge to income tax. So if Mr A had cleared a loan by voting a dividend or salary bonus which had been retained by the company he would be entitled to relief under Section 458 even if he drew a new loan.