A close (company) call
Most owner-managed companies are defined as ‘close’ companies. The ‘participators’ are the directors and other shareholders who together control the company. Where a close company makes a loan to any participator which remains outstanding nine months and a day after the end of the accounting year in which the loan was advanced, the company must pay 25% of the loaned amount to HMRC.
Some directors repay a loan just before the nine month deadline and immediately take out another. HMRC reckon that’s an abusive attempt to get around the rules. The Government has changed the law with effect from 20 March 2013 to clamp down.
If a loan of at least £5,000 is repaid but then replaced by another (or a larger one) within 30 days, the 25% loan charge will apply as if the first loan was still there.
If the total borrowed is at least £15,000, and at the time of the repayment there is an intention to borrow more money, there isn’t a 30 day limit – the later borrowing will be treated as continuing the original loan.
If the repayment is made from salary or dividends, so that the participator is charged to income tax on that amount, these two rules won’t apply.
There are also new rules covering arrangements where company loans are made to participators indirectly through partnerships, LLPs or trusts. If your close company has connections to one of these structures, it could be caught, even if the arrangements are commercial.
Please talk to us if you think you may be affected.