Finance Bill Tracking Service 2010 | Budget 2010

BN15 RELEASE OF LOANS TO PARTICIPATORS IN CLOSE COMPANIES

Who is likely to be affected?

1. Close companies that release or write-off a loan or advance of money made to a relevant person who is a participator in that company or an associate of such a participator.

General description of the measure

2. Legislation will be introduced in Finance Bill 2010 to deny a corporation tax (CT) deduction for the amount of the release or write-off.

Operative date

3. The measure has effect for debt (or part debt) releases or write-offs on or after 24 March 2010.

Current law and proposed revisions

4. Close companies are defined in Chapter 2 of Part 10 of the Corporation Tax Act 2010 (CTA). In general a company is a close company if it is under the control of five or fewer participators. A participator is a person "having a share or interest in the capital or income of the company" and includes amongst others, loan creditors and persons with the right to acquire share capital or voting rights in the company as well as possessors of share capital in the company.

5. When a close company makes a loan or advances money to a relevant person who is a participator in the company or an associate of a participator, section 455 of CTA imposes a charge equivalent to CT on that company. A relevant person is either an individual, or a company receiving a loan or advance in a fiduciary or representative capacity.

6. Under the CT rules governing corporate debt (the "loan relationships" rules) the company may be entitled (subject to anti-avoidance rules) to a full deduction against its CT liability. Broadly, these rules provide that the taxable and relievable credits and debits brought into account arising to a company under its loan relationships are those arising under generally accepted accounting practice (GAAP). A loan released or written off will normally give rise to an expense recognised in the company's accounts under GAAP.

7. This measure prohibits any deduction being brought into account for loan relationship purposes for the release or write off of such a loan (in whole or in part) on or after 24 March 2010.

8. The income tax treatment on the person to whom the released or written off loan was made is at Chapter 6 of Part 4 of the Income Tax (Trading and Other Income) Act 2005. Broadly, that person is treated as if they had received a distribution. This treatment is unaffected by this measure.

Further advice

9. If you have any questions about this change, please contact Mark Lafone on 020 7147 2602 (email: mark.lafone@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk