Chapter 30 Close Company Implications Flashcards
30.1 Introduction
Close company rules exist to prevent shareholders and directors of close companies from using the companies as an extension to their own private bank without paying tax. Rules exist with regards to loans to participators and benefits provided to participators.
30.3 Section 455 Tax
For loans or advances made on or after 6 April 2016, the tax is calculated as 32.5% of the loan and is payable by the company. The amount of the loan is taken as the lower of the amount outstanding on the last day of the accounting period or the normal due date.
30.4 Repayment of s.455 tax
Where the loan is either repaid by the participator or released or written off by the company, the tax will be refunded. The refund is made by reducing the company’s tax liability for the accounting period in which the loan is repaid or written off. For small companies the tax is repaid nine months and one day from the end of the accounting period in which the loan is repaid. Claims for relief should be made within four years of the end of the accounting period.
Bed and breakfasting rule – the repayment of tax will be restricted if within any period of 30 days:
• One or more repayments totaling £5,000 or more are made by a participator to a close company in respect of a loan to a participator, and
• The participator borrows a total of £5,000 or more from the company in a subsequent accounting period.
If the amount equals or exceeds the repayment, no s.455 tax will be repaid. If there is an excess of borrowing over the repayment and the amount is still outstanding at the due date of the accounting period then further s.455 tax is paid. If the amount borrowed it less than the repayment, some tax will be repaid but only in respect of the amount of the repayment that exceeds the amount reborrowed. In addition if:
• Immediately before a repayment there is a loan outstanding of £15,000 or more from the company, and
• At the time of employment there are arrangements to draw further advances of money from the company to replace some or all of the amount repaid, and
• The amount of the new borrowing under the arrangements is £5,000 or more
Then repayment of s.455 tax will be restricted as above.
30.5 Implications for the participator
If a company writes off or leases a loan, the participator is treated as receiving a dividend equal to the amount written off. An individual will pay tax via self-assessment on this, date of the dividend is the date the loan is written off.
From the companies point the release gives rise to a debit under the loan relationship riles, but this is not an allowable deduction for CT purposes. If the participator is an employee the loan is earnings from employment for NIC purposes.
