Loans in close companies

HMRC have published a consultation document on whether to reform the rules governing the taxation of close company loans to their participators (and other related arrangements) and on options for such reform, for comment by 2 October 2013 advise Harris & Co chartered accountants Northampton who are specialist small business accountants.

Close companies are those controlled, directly or indirectly, by five or fewer participators or by any number of directors who are participators. Participators are individuals who have shares or an interest in the company. A tax charge applies where value is extracted from close companies by participators, other than by way of salary or dividend. The consultation covers options for reforming the rules which govern extractions of value, usually as loans or advances, from close companies by participators.

The main purpose of rules governing the taxation of close company loans to their participators is to deter close companies from transferring value to their participators in ways which are not chargeable to income tax or National Insurance Contributions as remuneration or dividends, for example, as loans. The Government is interested in the scope and need for updating the legislation in line with its objectives for a fairer and simpler corporate tax regime, more robust against avoidance.

The four broad options identified by the Government are: maintaining the current regime; increasing the tax rate but retaining the structure and operation of the regime; replacing the current repayable charging system with a lower rated but permanent charge which arises annually on amounts outstanding at the end of each accounting period until the extraction is repaid to the close company; and replacing the current repayable charging system with a lower rated but permanent charge which arises annually on average amounts outstanding during the accounting period.

This consultation applies to all close companies, including most small companies which, by the nature of their ownership, are close companies, and their participators. The Government intends that any reform to the regime would apply to relevant extractions in value which occur from April 2014.