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.

External Link

GAAR Advisory Panel Opinion of 16 December 2020

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