Loans to participators

Mark Joscelyne, Tax Partner, CMS

Given the general thrust against cash being returned or otherwise made available to stakeholders in companies without “proper” tax being paid  (eg. the disguised remuneration legislation) it is perhaps unsurprising that various tax planning opportunities around the loans to participator (“LTP“) rules are being blocked.

The LTP rules have been in existence for several decades and exist in order to deter close companies making tax free loans to their participators rather than paying them taxable remuneration or dividends. This is achieved by imposing a tax charge of 25% of the loan on the close company, such tax being due and payable nine months after the end of the accounting period in which the loan was made.  If the loan is repaid before the nine month date then the LTP charge to tax falls away; if it is repaid after that date then the tax is refunded to the company. The LTP provisions only apply where the loan is made to an individual, or to a company in a fiduciary capcity.

The measures announced today essentially block three types of arrangement designed to avoid the LTP charge:

   (1)    loans using intermediaries;
   (2)    transfers of value by the company in non-loan form; and
   (3)    “bed and breakfasting” (re-cycling of loans).

Arrangements falling within (1) include where a loan is made to a partnership which is a participator. Although partnerships are transparent, if the partnership includes one or more partners who are not individuals it has been possible to argue that the loan is not made to an “individual” or “individuals” and so the LTP charge does not arise.

Arrangements within (2) include where an individual participator in a close company and the close company form a partnership with the partnership profits being allocated under the partnership agreement to the company. The company then leaves the profits undrawn on capital account in the partnership or, having drawn the profits, contributes the cash back to the partnership. In either case it is then argued that amounts drawn from the partnership’s capital account by the individual are not loans or advances and are therefore not caught by the LTP rules.

Typical arrangements within (3) simply involve the loan being repaid before the nine month date and then shortly afterwards a further loan being made. Under the proposed new rules, if a loan of more than £5,000 is repaid to the close company (whether or not before the nine month date) and within 30 days the company makes a further loan (or there is an extraction of value within (2) above) then the LTP charge in respect of the original loan will apply notwithstanding the repayment. Further, even if the 30 day rule does not apply, the original LTP charge will still apply if there are outstanding amounts of £15,000 or more and at the time of repayment there are arrangements or there is an intention to redraw the amount through another loan or other extraction of value.

Legislation is to be included in the Finance Bill (to be published on 28 March 2013) which will essentially counteract the above arrangements, with effect from today (20 March 2013).

It will be interesting to see how some of these proposals look once the draft legislation is released and in particular how the concept of value extraction is dealt with. It is also interesting to speculate as to to whether and to what extent these types of arrangements would anyway have been caught by the proposed GAAR. Presumably HMRC think that they would not or would be unlikely to be caught.

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