Osborne's move against loans from close companies isn't enough for HMRC

Despite having already announced changes in this year’s Budget to the rules on lending to participators (including directors) of close companies, HM Revenue & Customs (HMRC) has launched a consultation on further changes, writes chartered accountant Davies Mayers Barnett.

HMRC has said that this is necessary to deter participators from extracting value from companies using methods to avoid paying the income tax or National Insurance Contributions (NICs) that would arise if they had received remuneration or dividends.

At present where a taxable loan has been made to a director or participator by a close company and it is not repaid within nine months of the company’s year end, the company is liable to a tax charge equal to 25% of the outstanding amount (known as an s455 charge).  However, if the loan is subsequently repaid, the tax can be repaid nine months and one day after the end of the accounting period in which the repayment is made.

Amongst the options being suggested by the consultation document is the possibility of increasing the s455 charge to 40% of the outstanding amount (instead of the current 25%).  Another option is that the s455 charge could be replaced by a non-refundable annual charge on loans outstanding at the company’s year end.

The consultation is open until October 2nd so we should get some more detail on any proposed changes later in the year.  However, HMRC has already suggested that any loans which are in place before a new regime is introduced would, subject to appropriate transitional arrangements, be able to continue to be taxed in accordance with the current regime.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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