On 9 July 2013, HMRC published a consultation paper seeking views on the possible reform of the rules relating to close company loans to participators.

The government would like to have a close company regime that deters the avoidance of income tax. According to the consultation paper, the fact that three new avoidance rules had to be introduced in Finance Bill 2013 highlights the fact that section 455 Corporation Tax Act 2010 is itself a target for avoidance behaviour.

The rules aim to deter close companies from transferring value to participators otherwise than as dividends or remuneration. Broadly, they impose a 25% corporation tax charge if a close company makes a loan to a participator, or an associate of his, and the loan, or part of it, is outstanding more than nine months after the end of the accounting period in which it was made.

The consultation paper identifies four potential options for reform as follows:

  • maintain the current regime;
  • increase the tax rate but retain the structure and operation of the regime;
  • replace the current repayable charging system with a lower rated but permanent charge which rises annually on amounts outstanding at the end of each accounting period until the extraction has been repaid; and
  • replace the current system with a lower rated but permanent charge which rises annually on average amounts outstanding during the accounting period.

This list of options is not exhaustive and alternative proposals are invited.

The intention is for any reforms to take effect from April 2014.

Responses must be received by 2 October 2013 and should be sent by email to: ellen.milner@hmrc.gsi.gov.uk

For the consultation document click here.