Contractors' Questions: How does Budget 2013 tax loans from close companies?
Contractor’s Question: What is the government’s announcement in Budget 2013 to close three loopholes used to attempt to avoid the tax charge on loans from close companies (to individuals with a share or interest in the company), likely to mean, in practice? Unlike many other Budget measures, I note that this measure has immediate effect.
Expert’s Answer: Loans from close companies to their participators are indeed identified in 2.194 of Budget 2013.
When a close company makes a loan to one of its participators (broadly, a person with a share or interest in the company), the company is required, subject to certain limited exceptions, to pay an amount of “notional tax” to HMRC equal to 25% of the amount of the loan. The notional tax is repaid once the loan has been repaid.
With effect from March 20th 2013, the government is introducing three changes to tackle what it perceives as avoidance of this tax charge. These changes are:
- to put beyond doubt that loans to various intermediaries (principally partnerships and trusts) are within the scope of the charge;
- transfers of value (other than loans of money) will be brought within the scope of the charge when there is a corresponding receipt of value by the participator; and
- the repayment will be reinforced so relief is only given for ‘genuine’ repayments and not, for example, where loans are repaid within the time limit to avoid a charge but then re-granted shortly after.
Although the government’s wish to tighten the rules in this area is to be understood, it is to be hoped that the “appropriate exceptions and relief from the charge” to be included in the legislation will not catch genuine commercial arrangements without a tax avoidance motive.
The expert was Tim Hall, of business and accountancy advisory BDO Stoy Hayward.