The 2013 Budget announcement included a brief outline of how the law will be changed to tax loans taken out of owner-managed companies by the shareholders/directors (known as participators). We have now seen the draft legislation so we can give you further details of how the tax law will apply for loans or repayments made on and after 20th March 2013.
Where a participator borrows from his company and repays the loan within nine months of the end of the accounting year in which the loan was taken, there is no tax charge for the company.
However, where the loan is outstanding for longer, the company must pay 25% of the loan balance as Corporation Tax to HM Revenue & Customs. This Corporation Tax is then repaid when the loan is fully repaid.
Four changes may affect when or if this Corporation Tax is payable:
- Thirty day rule – Where a loan of £5,000 or more is repaid to the company, but within 30 days amounts totalling £5,000 or more are borrowed by the same borrower or one of his associates, the first loan is treated as not having been repaid and is treated as continuing for the purposes of calculating the Corporation Tax charge.
- Intention or arrangements in place – Where the loan is £15,000 or more, the thirty day rule is ignored if at the time of the repayment of the first loan, the borrower intends to borrow again from the company or has arrangements in place to do so. If those later loans are made they are treated as a continuation of the first loan.
- Using a third party – Loans channelled from the company through LLPs or partnerships in which the participator is a member are treated as if the loan was made directly to the participator. This also applies if the loan is advanced to a trust of which a participator in the company is a beneficiary, or potential beneficiary.
- Conferring a benefit – This is intended for the situation where an arrangement, perhaps a partnership structure between the company and a participator is used to transfer value from the company to the participator. It is unclear how this will work in practice, but any partnerships involving a company and one or more individuals will have to be reviewed.