Corporation tax - small companies rate - 50/50 ownership - directors' loans

Corporation tax - small companies rate - 50/50...

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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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By Steve Kesby
15th Oct 2013 12:35

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.

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By WaldoLydecker
15th Oct 2013 13:00

Thanks - I'm with you on that as far as it goes - but there are some potential absurdities - eg in a 50/50 company director A buys some stationery - the company is cash short  so he agrees to defer repayment until some debtors are paid - does he control the company meantime?

As I say I vaguely recollect seeing something that implied that a more formal type of loan was required before a participator ranked as a loan creditor for these purposes, so I guess that is the question - are there circumstances in which a loan is disregarded for these purposes if it arose informally?

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By Steve Kesby
15th Oct 2013 13:55

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.

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By WaldoLydecker
15th Oct 2013 14:20

If I understand the HMRC guidance correctly then the definition of "loan creditor" does matter because only assets coming to a participator in consequence of his rights as a participator are considered.  For these purposes a loan creditor is a participator. That doesn't necessarily help me because the definition of loan creditor seems to be very widely drawn.

It includes "a creditor in respect of .............any debt..............for money borrowed or capital assets acquired by the company".  (Actually it's not clear whether my stationery example above would be caught - would that be a debt for money borrowed? Or would it be for (non capital) assets acquired by the company?).

As you say one might hope that common sense would prevail if in the normal course of business directors incurred expenses or made informal loans to the company.  The amounts in my client's case are not actually small,  but I do think the decision to leave these amounts in the company were very informally/casually made - the director's could easily have taken these sums out,  the company has the surplus cash, but they haven't needed the money and no doubt saw no urgency in it.

 

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By WaldoLydecker
15th Oct 2013 17:18

Pleased to say this problem has now gone away for non-technical reasons.  (As is often the case with 50/50 clients I have a closer relationship with one of the shareholder/directors.  The other director has a larger director's loan, so if either director has control it is him.  It turns out that, unbeknown to me, he had divested himself of his other business interests before the accounting period started. So there are no associated companies).

Thanks again for the helpful input.

 

 

 

 

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