In a measure not included in his much-vaunted business tax roadmap, the Chancellor increased the loans to participators tax rate from 25% to 32.5% with effect from 6 April 2016.
The measure aims to prevent company directors avoiding income tax and NI charges by paying themselves through loans or advances that are not repaid, rather than taking dividends or salary. The charge is commonly labelled by advisers as “s455” after the section of the Corporation Tax Act that applies in these circumstances.
In paragraph 2.42 the Budget Red Book states: “The government will increase the loans to participators tax rate from 25% to 32.5%, keeping it aligned with the higher rate of tax charged on dividend income. The new rate will apply to loans made or benefits conferred by close companies on or after 6 April 2016. (Finance Bill 2016)”
The rate continues to mirror the higher rate of dividend tax at 32.5%, with the changes encompassing loans, advances and arrangements made on or after 6 April 2016.
Commenting on the change tax lecturer Rebecca Benneyworth said she hadn’t anticipated it but could understand why it came about.
“What it’s going to do is mirror the dividend tax charge on that amount if it was taken as a dividend," said Benneyworth.
“Essentially the difference is that the s455 is not actually a tax charge – the company pays it but if the loan is repaid then the s455 tax comes back. But obviously for a lot of people this doesn’t happen.
“It’s really a cashflow thing because I don’t think it actually generates any tax. Technically it’s a loan from the company, but it does just level the playing field. Otherwise you wouldn’t take it all as income, you’d take it as loans because it would be cheaper.”
In an Any Answers thread discussing the measure, AccountingWEB user mabzden commented: “I'll be surprised if there are any changes to the CT600A form. There are problems (ie different rates for different loans), but these issues will only affect [accounting periods] straddling 6 April 2016.”
Ruddles added that although they advise clients not to borrow, “If a shareholder is thinking of borrowing £40,000 in the next few weeks we would advise him to do so before 6 April 2016 - unless perhaps if the company's year-end is 30 April. It may depend on intentions re repayment.”