HMRC has launched a consultation on the possible reform of close company loans to participators. The proposed changes will affect many companies. A close company is one controlled, directly or indirectly, by five or fewer participators (these are usually the shareholders), or by any number of directors. The current rule is that where a shareholder or director of a close company has a loan which remains outstanding to the company after 9 months following the end of the accounting period, the company must pay a temporary tax charge of 25% (known as “section 455 tax”). The tax will become repayable to the company 9 months after the accounting period in which the loan is repaid. Currently, there are no tax consequences to the company if the loan is repaid to within 9 months of the end of the accounting period, although an income tax charge may arise on the borrower under the taxable cheap loan rules.
The proposed changes detail four possible options, these being to:
- Continue with the current regime.
- Continue with the current regime, but increase the tax rate. The consultation includes 40% as an example.
- Replace the current charging system with a lower tax rate, for example 5%, but this would be a permanent tax charge arising annually on any amount outstanding at the end of each accounting period until the entire loan has been repaid to the company.
- Replace the current charging system with a lower tax rate, but this would again be a permanent charge which arises annually, this time on the average amounts outstanding during the accounting period.
The closing date for comments on the HMRC consultation document is 2 October 2013.