Dealing with directors" loan accounts
HMRC has tightened the rules on loans to owner managers, says Harris & Co accountants Northampton. Section 455, Corporation Tax Act 2010 (CTA 2010) is a key anti-avoidance consideration now for owner-managed companies. Without it, owner managers could avoid a tax charge by arranging for the company to lend them funds (as opposed to paying a ‘taxable’ income to them).
In recent years, HMRC has seen the increased use of ‘bed and breakfast’ techniques to circumvent the s455 tax charge.
HMRC previously argued that such arrangements were not a real repayment on the grounds ‘that viewed realistically no repayment of the loan was made’ since it was never intended to be lasting (HMRC Enquiry Manual EM8565). Where HMRC was able to successfuly make these arguments, it would seek penalties for careless or deliberately incorrect s455 tax cancellation/repayment claims.
FA 2013 counter avoidance rules
The Finance Act (FA) 2013 introduced measures to negate the tax ‘efficiency’ of using bed and breakfasting techniques. For loans repaid after 19 March 2013, the legislation prevents the cancellation or repayment of the s455 tax charge in two different situations - the 30 day rule and the motive test.
The 30-day repayment rules
This applies where within a 30-day period:
- a shareholder makes repayments of their s455 loan (of £5,000 or more); and
- in a subsequent accounting period, new loans or advances (of £5,000 or more) are made to the same shareholder or their associate.
This catches the usual form of bed and breakfasting arrangement. In such cases the s455 tax is only cancelled if and to the extent that the repayments exceed the new loans/advances.
These restrictions do not apply if the loan repayment gives rise to an income tax charge on the relevant shareholder or their associate.
The legislation provides that the ‘repayment’ itself must give rise to the income tax charge.
In practice, HMRC accepts that the crediting of an interim dividend to a loan account represents ‘payment’ at the time the relevant book entry is made, since the amount is then ‘placed unreservedly at the disposal of the directors/shareholders as part of their current accounts with the company.
The ‘motive test’ rule
This provision operates where a shareholder’s s455 loan is £15,000 or more. It applies where, at the time of the repayment, arrangements have been made for new loans (exceeding £5,000) to replace some or all of the amount repaid.
The motive test matches loan repayments to any new loans that are being ‘planned’ to be made to the shareholder. To the extent that the loan repayments are matched with such new (future) loans/advances, they will not relieve the relevant s455 liability.
This provision does not apply if the repayment transaction gives rise to a taxable bonus or dividend.