Posted in: Corporation Tax
Small business owners who trade through a limited company likely have what is known as a ‘close company’. A close company is one which is resident in the UK and is controlled by:
Control here means the majority of:
In this context, a director is anyone who acts as a director, but also includes any manager of the company, who, with their associates owns 20% or more of the voting shares.
There are certain tax consequences to be aware of in relation to close companies. If anyone is thinking of trying to get around these rules (perhaps because they are from a large family) we also need to take into account of what we mean by a shareholder in this context.
A shareholder includes the individuals immediate family. This includes brothers and sisters, spouse, linear descendants and linear ascendants, so parents, grandparents, children and grandchildren. It excludes brothers and sisters in-law, cousins, aunts and uncles.
It also includes business partners (but not co-directors), trustees of trusts and nominees (nominee shareholders).
The main one we need be concerned with is a loan to a participator. This can occur in a number of ways. The company could make a loan directly to one of its shareholders, or a loan to the shareholder’s spouse or child, or it could result as a consequence of one of the shareholder/director’s loan account being overdrawn.
From 20 March 2013, the loan rules also apply where a company makes a loan to a partnership in which one of the participators is a partner.
When this happens HMRC will apply tax of 25% to the loan. This is imaginatively known as s.455 tax. The tax is payable by the company along with its mainstream corporation tax. Companies have to pay their mainstream corporation tax by 9 months and one day after the end of their accounting period.
If the loan is repaid in part or in full before the corporation tax is due, then the tax on the loan is accordingly reduced.
The tax is reclaimable by the company once the loan is repaid or the loan waived. The repayment is collected by the company when it makes its next corporation tax payment.
If the loan is waived, it is treated as a dividend in the hands of the shareholder and is taxed under their self assessment at the usual dividends rates. However, if the waiver is not a dividend from the company’s perspective and the participator (or his/her associate) is an employee of the company, it will be treated as employment income and taxed under PAYE. this then becomes a deductible expense of the company.
If the participator (or his/her associate) are not an employee and the company do not consider it a dividend, then the waiver is treated as an expense to the company under the loan relationship rules, but it is not deductible for corporation tax purposes.
A further consequence we need to consider for such loans is that they may give rise to an employee benefit by way of a beneficial loan. Loans to employees at less than HMRC’s official interest rate give rise to a taxable benefit where the value of the loan is greater than £10,000 (£5,000 before 2014/15).