Inter-company loan: how to avoid becoming an 'investment company'

[ChimpMaster]

This is with regards to planning for liquidation in the midterm future.

Potentially this is a stupid question but I'm going to ask anyway.

Assume your IT company makes a loan to a connected company, and receives interest on that loan. Does the 20% investment limit for ER include the loan or just the interest received on the loan?

I'm going to quote Maslin's post from another thread here, in particular looking at the notes in bold:-

Most of the criteria for ER are very black and white. Assuming you've been a director, own >5%, and it's been going for >1 year, then the only remaining risk I see is whether it qualifies as a trading company. For that, there's 4 x 20% tests. Any ex contractor going into an MVL is realistically going to fail the assets test, as the hefty war chest is not required working capital for the running of the business. However, typically they'd pass the other 3 tests with flying colours. Ie <20% of income will have come from investment, <20% of expenditure will have related to investment, and <20% of director's time would have been devoted to investment related activities. With glowing passes for 3 of the 4 tests, I don't see HMRC challenging it. Of course this changes if someone uses the retained profit to buy BTLs/similar.

[northernladuk]

Have you asked Maslins?

[ChimpMaster]

Have you asked Maslins?

Just putting this out there for the accountants and liquidators in general.

[WordIsBond]

I don't know the ER rules but assuming that Chris Maslins knows what he's talking about this is easy. I know what is income and what is expenditure. The loan itself is neither. It's an asset.

Interest is income, sale of goods or services is income, a dividend is income.

Accountancy fees, brokerage fees, salary, staff pensions, etc, would be expenditure.

Loans, bank accounts, savings accounts, shares, bonds, property, these are assets.

[Maslins]

What WiB said.

To my mind an intercompany loan (assuming it's an asset for the company in question, ie your company is owed that money, rather than owes it to someone else) won't really be any different to a deposit account balance. Ie there's definitely an argument that >20% of your company's assets are investment rather than trading. However, assuming it's not getting an unreasonably high rate of interest, it's likely you'll still be fine for the other 3 tests.

[ChimpMaster]

Great, just what I thought. I'm having some interesting discussions with my 2 groups of accountants over a number of things and this is one of them.

So just to add an example: Company A lends £100k to connected company B and charges 3% interest annually. The £3,000 income is the only thing that would count as the "investment".


Regarding claiming ER: another point one of the accountants made was that they would have to seek clearance from HMRC, if the company had a high level of cash in it that was not being utilised for trade. This is why I asked (Maslins) in the other thread about clearance, because I thought the rules had changed recently so that clearance is no longer sought in advance (I mean related to cash balances). Any thoughts on this?

[Maslins]

So just to add an example: Company A lends £100k to connected company B and charges 3% interest annually. The £3,000 income is the only thing that would count as the "investment".

Yeah the £3k would count as investment income...so assuming trading income for the year was at least £12k, then superficially that would pass the 20% test (total income £15k, investment income £3k of that).

Regarding claiming ER: another point one of the accountants made was that they would have to seek clearance from HMRC, if the company had a high level of cash in it that was not being utilised for trade. This is why I asked (Maslins) in the other thread about clearance, because I thought the rules had changed recently so that clearance is no longer sought in advance (I mean related to cash balances). Any thoughts on this?

I think the clearance they're talking about is entirely unrelated to the clearance liquidators talk about. As an accountant, or indeed an individual, there are lots of things you can request advanced clearance for. Basically means you saying "Hi HMRC, I'm planning on doing X. I believe the tax treatment will be Y, please can you confirm you agree."

It would only generally be used where rules are a bit ambiguous...and there is a school of thought (not saying whether it's right or wrong) that this is counter productive. Ie if you just go for it, claim ER, and hypothetically HMRC query it, you just respond that of course ER applies as you meet criteria XYZ. If you specifically ask for advanced clearance, you're effectively admitting you think it's grey, hence accepting a possibility you don't qualify. Inevitably HMRC will be a bit biased towards the answer that gives them the most tax.

My personal view, if the only thing possibly suggesting you might not qualify is that you have a fairly high cash balance, I would go ahead and claim ER.

This is very different to liquidator clearances. They're more "Hi HMRC, are you happy you've got every CT/VAT/PAYE return you'd expect for this company, and that any liabilities from them have been settled?"