I have a situation, which must be fairly common, where two otherwise unconnected shareholders/directors have 50% each of the share capital of a trading company. However at its inception they both paid some expenditure on the company's behalf and as things stand they have loans to the company in broadly similar but not identical amounts. Both directors have other business interests.
The question is whether the director with the largest loan has control of the company in considering whether it has associated companies for small profits relief purposes. My understanding is that without the loans neither shareholder would have control. However if both are loan creditors within the definition, then the one with the largest loan has the right to receive the greater part of the assets in a winding up, and hence has control. This seems an unsatisfactory result, since the fact that one director paid out a little more on the company's behalf will not in fact give him control.
I vaguely recall at some point in the past reading that director's current account loans would not be taken into account in this situation but I'm having difficulty tracking authority for that down.
I'd be most grateful for any enlightenment anyone can offer.
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The control test
... that catches you is whether the person is entitled to more than 50% of the company's (gross) assets on a winding up. Their rights as a participator, by virtue of being a loan creditor aren't otherwise counted for determining control
Under the winding up test (and only one of the tests needs to be satisfied), the director that is owed the most amount of money does have control.
I don't think so
It is the case that someone that is owed money isn't necessarily a loan creitor, but the importance of the definition of a loan creditor isn't important here.
All that is important is what would happen on a winding up. The liquidator would realise the assets and then distribute them, first to the creditors in order of preference and then to the shareholders.
In a solvent liquidation, the shareholder who is owed the most will receive the most.
So strictly speaking, your director who buys the stationery has control while the additional amount is owed to him. If he controls other companies then they're the companies associated companies for that brief period, meaning they will be treated as associated for the whole accounting period of which that brief period forms part.
However, that being said, I'd expect a certain amount of pragmatism from HMRC where its a small amount only outstanding for a short amount of time.