Back to basics: Tax on Loans to Participators

Paul Townson in Birmingham and Chris Holmes in our London Tax Group authored “Back to basics: Tax on loans to participators”, published by Tax Journal on 2 July 2021.

S455 CTA 2010 broadly subjects loans by a company to participators and associated persons to tax at an income tax rate, but chargeable on the company as if it were corporation tax. The tax is eligible for repayment once the loan is repaid. The charge extends to indirect loans and advantages as a result of a loan. There are exceptions for de minimis amounts where the individual works full time for the company and has no material interest in it. Points to watch in practice include payment dates, repayments, waivers, cheap loans, multiple accounts, and management buyouts.

The article includes sections on:

  • Why tax a loan from a company?
  • Situations where the rules can apply
  • The tax charge and administration
  • Exceptions
  • Points to watch in practice:
    • Multiple accounts
    • Cheap or non-interest loan
    • Repayments
    • Waivers
    • Claiming the repayment
    • New Company Management Buyouts (NewCo MBOs)
    • Recent Developments.

Such loans are treated as subject to tax at an income tax rate, but chargeable on the company as if it were corporation tax. The tax is eligible for repayment once the loan itself is repaid because, in many cases, this is the time at which income subject to income tax is extracted from the company. Consequently, from the perspective of HMRC, it is effectively a deposit on the income tax it will receive - in short, if the company has sufficient funds to lend the amount to a participator, it must also ‘lend’ some to HMRC. To the individual concerned, it removes the incentive to delay the extraction.

The loan to participator provisions continue to be a key tax protection for the Exchequer. They quite successfully ensure that HMRC collects tax, even if just temporarily, in circumstances when the shareholder is otherwise personally able to enjoy company funds.

For more information, or for assistance, please contact Paul Townson or Chris Holmes.