This consultation has lapsed: HMRC decided not to take this any further at present.

HM Revenue & Customs have launched a new consultation on a proposed reform to the close company loans to participators rules. These proposals come on top of changes already made in Finance Act 2013.

The Finance Act 2013 introduces three new measures for close company loans which apply from 20 March 2013. These are aimed at curtailing:

The concern in government is that too many close company loans are being used to avoid income tax. While it is not perceived to be a problem where a loan is short term and cleared via dividends the government does not want participators to use loans as a method of permanently avoiding income tax.

HMRC suggests four potential new options for reform of the close company rules are as follows:

1. Maintain the current regime.

2. Increase the s455 CTA 2010 tax rate to 40% but retain the structure and operation of the regime.

3. Replace the current repayable charging system with a lower rated but permanent annual charge on amounts outstanding at the end of each accounting period until the extraction is repaid to the close company.

4. Replace the current repayable charging system with a lower rated but permanent annual charge on average amounts outstanding during the accounting period.

Whilst Option 2 is the simplest to enact, options 3 and 4 would involve additional calculations.

Outline of a proposal for a permanent charge

Option 3: at the end of each year the close company would consider the loan position with the participator and a charge would arise on the balance of any outstanding loans. If the loans were repaid during the nine month period before the tax was due, relief could be given for the charge which had arisen on the portion repaid This process would repeat at the end of each accounting period until the loan was repaid. To reflect that each loan could be charged in multiple accounting periods, the rate of the charge could be set at a lower level, for example, 5 per cent. The tax would not be repayable to the company when the loan was repaid. For short accounting periods, the tax charge could be reduced in proportion with the number of days in the accounting period.

Option 4: the alternative version of optiion 3 is a charge based on average amounts outstanding. Companies would have to establish the average amount of loan which was outstanding on a daily basis throughout the accounting period and the charge would apply to this amount, arising at the end of each accounting period. All close companies which make loans at any point during the accounting period, regardless of whether these loans are repaid, would be subject to the charge. This would be a significant departure from the current rules where only those close companies which make loans to their participators which are not repaid within nine months of the end of the accounting period must pay any tax.

This consultation closes on 2 October 2013