On 9 July 2013, HMRC published a consultation document setting out possible changes to the loans to participator rules. These rules have remained largely unchanged since 1965; however, reform has already started with amendments made in Finance Act 2013 to deal with ‘bed and breakfasting’ and corporate partners.
The consultation document proposes four options:
- Maintain the current regime. This means that if a company makes a loan to a participator, and the loan is not repaid within nine months after the end of the company’s accounting period, the company is liable to a 25% tax charge under CTA 2010, s 455 on the loan outstanding. When the loan is repaid the tax can be reclaimed nine months after the end of the year in which the repayment is made;
- Increase the tax rate but retain the structure and operation of the scheme. The rate suggested in the consultation document is 40%;
- Replace 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 loan is repaid. The suggested rate is 5%;
- Replace the current repayable charging system with a lower rated but permanent charge which arises annually on average amounts outstanding during the accounting period.
HMRC’s aim is to ensure that there is a workable deterrent to income tax avoidance by taking loans rather than taking dividends or remuneration from a close company. However, the consultation asks whether the proposed changes would inhibit genuine commercial practice, which is the fairest option, and how the proposals would affect administrative burdens for businesses.
The changes introduced in Finance Act 2013 have focussed attention on the operation of directors’ loans by addressing certain arrangements that HMRC see as unacceptable. These proposals take a closer look at the treatment of directors’ loans, with the aim of ensuring that payments by the company to directors/shareholders should be taxed either as remuneration or dividends. HMRC clearly want to stop the practice of using long term loans as a way of avoiding or deferring income tax liabilities.