Changes to director loan rules to stop tax avoidance for group companies
Changes to director loan rules to stop tax avoidance for group companies
Anti-avoidance rules continue to be tightened up to ensure shareholders cannot extract funds untaxed from close companies with immediate effect.
The measure, announced in the Budget, came into force immediately on 30 October 2024 and will amend section 455 loans to ‘participators anti-avoidance legislation’ in the Corporation Tax Act 2010 which prevents close companies recycling loans through two or more companies to avoid tax.
The change will affect participators in close companies that undertake tax avoidance arrangements, HMRC said. It removes opportunities for avoidance of the s455 tax charge on loans and benefits for participators that exploit the current mechanics of the anti-avoidance rule.
This will also bring the targeted anti-avoidance rule (TAAR) within the loans to participators regime in line with other TAARs.
HMRC have commented that ‘We have become aware of arrangements using a group of companies or amongst associated companies, so that new loans are made and then repaid in a chain such that no s455 charge arises on the increasing amounts extracted. The current legislation ‘cannot catch the behaviour’.
Business owners have always been subject to a section 455 charge if they draw loans from their companies which remain unpaid nine-months after the year-end. This tax is repaid by HMRC if the loan is repaid. The current charge is at 33.75% on the outstanding amount.
This rule is necessary as it prevents monies being taken from a company without a tax charge. Over the years, the law has been tightened to prevent various ploys to get around this charge.
The Budget now closes a further potential loophole which seeks to avoid this tax by recycling loans within a group of companies. This should not have any widespread impact since it is aimed at the relatively few businesses in a group.
Legislation will be introduced in Finance Bill 2024-25, effective from 30 October 2024, to ensure that where companies and their shareholders are attempting to avoid the s455 charge on any extractions, tax is payable whether or not there has apparently been a repayment, or a repayment is subsequently made.