The General Anti-Abuse Rule (GAAR) Advisory Panel has released an opinion which concluded that arrangements that purported to give an individual access to £950,000 without tax consequence were not a reasonable course of action.
The opinion covered arrangements designed to circumvent the Loans to Participators rules and a s.455 tax charge:
- An Individual had an overdrawn Loan Account with a Company.
- A Settlement was created by the Company which included debts totalling £950k.
- The benefit of the Settlement and the liability for the debt was contributed to a Limited Liability Partnership (LLP) in return for a 99.5% profit share.
- As a result, the Company owed £950k to the Settlement and had a 99.5% interest in the LLP which in turn was the beneficiary of the Settlement. Given the interest in the LLP, the Company effectively owed itself £950k.
- An agreement between the Company, the Individual and the Settlement was reached whereby the Individual took over the Company’s liability to repay the Settlement the £950k and in return was paid £950k by the Company which was credited to their Directors Loan Account.
The GAAR Advisory Panel concluded that neither the entering into nor the carrying out of the tax arrangements were a reasonable course of action as:
- There was an Income Tax advantage as the individual had the use of £950k without tax implications.
- There was no Corporation Tax advantage as no tax deduction was claimed.
- The transactions had no other purpose than to give the Individual £950k without tax consequence, the transactions involved contrived, artificial and abnormal steps to achieve this.
- The purported tax outcome was not consistent with the policy principles and policy objectives as funds had been received by an individual without tax consequences. Likely alternative transactions resulted in an Income Tax charge and included:
- A loan to a participator which would have attracted an s.455 charge.
- A dividend distribution or other remuneration which would have attracted Income Tax.
- There was a legislative shortcoming that the arrangements were trying to exploit as:
- The creation and assignment of the debt obligation was not regarded as being caught by the loan to participators anti-avoidance provisions.
- The arrangements were not consistent with established practice.
Useful guides on this topic
Close company loans toolkit (loans to participators)
This guide takes a detailed look at the Corporation Tax treatment when a close company makes a loan to a participator (director-shareholder). It also provides links to our guides for individuals on the making of loans to companies.
Directors’ loan accounts: Toolkit (subscribers)
HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced version with planning points.
General Anti-Abuse Rule: GAAR at a glance (freeview)
This note looks at the key features of the General Anti-Abuse Rule (GAAR) contained within the Finance Act 2013 and the basics of what you need to know about the provisions it contains when considering tax planning.
General anti-Abuse Rule (GAAR) (subscriber version)
What is the General Anti-Abuse Rule (GAAR)? When does it apply?
External links
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