The GAAR Advisory Panel have released an opinion on 'artificial repayment of a loan or advance to a participator' concludes that entering into and carrying out the scheme was not a reasonable course of action.
The following case was submitted to the General Anti-Abuse Rule (GAAR) Advisory Panel for its consideration:
- The director of a Close company had an outstanding loan account of c£1.6m at 31 December 2014.
- If that loan account was not repaid by 30 September 2015, a charge to tax under s.455 CTA 2010 (s.455) of 25% of the outstanding balance would be levied.
- The company's advisers wrote to the company on 16 September 2015 setting out the following plan:
- The director established NewCo with a subscribed share capital of £1,000.
- NewCo would then issue 1,990,000 £1 shares but not make a call on those shares.
- The director would personally guarantee that he would contribute the funds if called.
- The advisers concluded that the value of NewCo would be £2m due to the director’s obligation to contribute the call if asked.
- The director gave the shares in NewCo to the company as repayment of the loan balance.
- The directors' loan was then discharged prior to the 30 September 2015 and no tax under s.455 would become due.
- The plan was implemented on 25 September 2015.
The GAAR Advisory Panel concluded that the GAAR should apply as:
- s.455 was an anti-avoidance measure designed to tax the distribution of funds from a close company by way of loan unless that loan is repaid or written off.
- That amendments made to the s.455 legislation in March 2013 showed that Parliament's intention was to circumvent arrangements that caused a technical but not an economic repayment. As a result, if the arrangements did achieve a technical repayment and avoid the additional anti-avoidance provisions in s.464A or s.464C then there was a shortcoming in, or exploitation of, the legislation.
- That the arrangements in question contained contrived or abnormal steps:
- Incorporating NewCo had no apparent commercial purpose or substance.
- The issue of £2m of share capital and leaving it uncalled signified a lack of economic substance.
- The directors' obligation to contribute c£2m to a company with no trading record.
- NewCo was specifically created to enable the director's loan to be satisfied.
- The net result for the company is that it is still owed money by the director, albeit through NewCo as a subsidiary of the company, this was not consistent with the principle that the economic consequences should match the tax result.
- The transactions were proposed and implemented over a short period between 16 September and 25 September 2015.
- The arrangements were not consistent with standard practice accepted by HMRC.
The Panel said the taxpayers had devised a contrived way of circumventing the s.455 rules and that the entering into or carrying out the tax arrangements was not a reasonable course of action.
Useful guides on this topic
Directors' loan accounts: Toolkit (freeview)
A freeview toolkit with planning points for directors' loans accounts.
Directors' loan accounts: Toolkit (subscribers)
An enhanced subscriber toolkit with planning points for directors' loan accounts.
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).
General Anti-Abuse Rule (subscriber version)
This briefing note looks at the key features of the General Anti-Abuse Rule (GAAR), what areas of tax it covers and what you need to know about the provisions it contains when considering tax planning.