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Connected company loan write off

Loan write off between connected parties

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I'll explain the position:

1. company A loans money to company B (both owned by the same person). This was around 3 years ago and the funds largely refinanced property borrowing in company B (previously from director). 

2. loan between 2 companies now written off as no real I ntentions to repay in future. 

Typically this would create a CT charge in company B as it's liability to the debt has been released. However the companies are connected so (hopefully) the 'no tax' treatment should apply. 

Any thoughts on if this could be challenged by HMRC. The original intention was not a future write off but it now seems a sensible option. 

Replies (24)

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By whitevanman
11th Dec 2019 21:36

Did S459 apply 3 years ago?

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Replying to whitevanman:
Psycho
By Wilson Philips
11th Dec 2019 22:01

Is that relevant to the question? The answer to which is that there is nothing for HMRC to challenge.

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Replying to Wilson Philips:
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By whitevanman
11th Dec 2019 23:09

The OP asked whether "this" could be challenged. My point was that the challenge may be that they failed to pay S455 tax 3 years ago and writing off the loan now, might give rise to further issues to say nothing of penalties. Not the points the OP was necessarily considering but things that should be / have been considered from the outset and should definitely be considered now.

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By johngroganjga
12th Dec 2019 09:33

Why might a S455 liability have arisen on a loan by a company to another company owned by the same person?

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Replying to johngroganjga:
Psycho
By Wilson Philips
12th Dec 2019 09:54

Because of the way in which section 459 of CTA 2010 is worded. I would of course be arguing strongly against any such charge where the funds are used to repay an existing debt (my argument being that section 459 refers to a payment and not to a repayment) but the fact is that on a literal interpretation HMRC might argue that section 459 should apply.

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By johngroganjga
12th Dec 2019 10:39

But I thought S459 was about an onward loan by the debtor company to a person who was a participator of the creditor company but not of the debtor company - i.e. anti-avoidance. What am I missing?

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Replying to johngroganjga:
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By Tax Dragon
12th Dec 2019 10:59

That might have been its target market; HMRC does not object to the fact that applies far more widely.

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Replying to johngroganjga:
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By whitevanman
12th Dec 2019 11:19

Company A makes loan to company B. Company B uses that to repay loans from director. S459 can bite. All depends on the facts (as ever). If the loan is then WO, I am not sure relief would be due to Company A as no corresponding charge on B or participator. As I said, things to consider.

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Psycho
By Wilson Philips
12th Dec 2019 11:24

I can't see why there would be any relief - under the LR connected party rules. The fact that the loan is treated as made to a participator for the purposes of section 455/459 doesn't disturb the fact that the actual loan is a loan between connected companies.

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By whitevanman
12th Dec 2019 12:15

Again perhaps my reply could have been clearer (though I had not intended to do more than flag up possible issues). I was not referring to the LR position but to the issues of relief from the S459 charge where loan repaid or WO and indeed any possible charge on the participator (BIK) that MIGHT (I have not checked exactly what the legislation says so it might equally NOT) arise.

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Replying to whitevanman:
Psycho
By Wilson Philips
12th Dec 2019 12:22

I would be confident in saying that if the arrangements do in fact fall foul of 459 then relief would be due under 458 (HMRC have themselves acknowledged that it doesn't matter how or by whom the debt is cleared). I would also be confident in saying that, on a write-off, a deemed dividend charge would arise on the participator.

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Replying to whitevanman:
By johngroganjga
12th Dec 2019 11:40

I read “previously” in the question as meaning that the shareholder had previously lent to the debtor company, but by the time the loan to that company was made by his other company his loan had been replaced by third party financing. If not, what does “previously” mean?

In any event, do you agree that if a company has to pay tax on repaying a loan from a shareholder the law is an [***]?

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Replying to johngroganjga:
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By whitevanman
12th Dec 2019 12:25

The OP says that the funds were used to refinance borrowings "previously" provided by the director. From that, I might assume the money went from Company A to company B and then to director ( it would be far worse if it just went from co A to director!). As Wilson implied, there is a real purpose behind the legislation and whilst the present case might look harsh, take a slightly different possibility. Director lends money to co B. Investment by B starts to look dodgy (in value) so money is transferred from co A which simply repays directors loans and any consequential loss now falls on co A rather than the director (assumed shareholder) personally.
The whole point of the legislation in s455 etc is that it is "anti-avoidance" and inevitably, is widely drawn. That in turn makes it possible that some innocent cases may be caught in the, widely cast, net.

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Replying to whitevanman:
By johngroganjga
12th Dec 2019 15:30

If the flow of funds was as you think, I don’t see why the word “previously” was included. I am well aware of the real purpose of S459, but even if you are right about the flow of funds, and that it triggers a tax liability, you must agree that this would be one of the innocent cases that Parliament can’t have intended the legislation to apply to.

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Replying to johngroganjga:
Psycho
By Wilson Philips
12th Dec 2019 11:31

Example - company A lends to non-resident company B. Company B lends same funds to participator of both A and B. Without section 459, the loan could escape section 455 charge.

I agree, though, that where the funds are being used simply to repay an existing debt this can hardly be described as avoidance although as already noted that doesn't mean that HMRC would not seek to apply it.

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Replying to Wilson Philips:
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By Tax Dragon
12th Dec 2019 06:32

Wilson Philips wrote:

Is that relevant to the question?

Please take no offence at this, as I could make similar remarks about most contributors (probably including me) but I wonder why you think that everybody else should do as you do. Also, in this specific case the OP referred to "no tax". A reply adopting your approach could be highly misleading, depending on how one interprets "no tax".

I am critiquing your approach. I am not criticising you. Nor do I understand why you appear to be criticising wvm.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
12th Dec 2019 09:50

No offence taken. And in the same way that you are not criticising me, I was not criticising WVM.

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Replying to Wilson Philips:
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By whitevanman
12th Dec 2019 11:23

No criticism implied. I often bemoan the fact (sometimes openly) that people stray off the subject and I could have been a little more explicit with my original post (too early in the day).

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Hallerud at Easter
By DJKL
12th Dec 2019 12:21

Is this thread an example of Christmas goodwill, you are all being unusually civil to one another; visits from ghosts of Christmases past, present and future?

Anyway thank you all for the discussion, which has been interesting

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Replying to DJKL:
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By whitevanman
12th Dec 2019 12:40

Christmas? Bah "Celebrations" (to bring it up to date, does anyone sell humbug anymore?).
Like Scrooge, I can cope with the ghosts but the thought of becoming one is somewhat less attractive.

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Replying to whitevanman:
Hallerud at Easter
By DJKL
12th Dec 2019 15:42

I thought it was humbugs plural. Best bet around here is Candersons on Leith Walk, she does retro sweets- I still have to pop in this year to purchase stocking fillers for my somewhat long in the tooth children- I wonder if say 30 ought to be the age when a stocking stops getting hung.

https://en-gb.facebook.com/CandersonsSweetShopEdinburgh/

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Replying to DJKL:
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By whitevanman
12th Dec 2019 17:28

Since austerity was introduced, it has had to be singular, Chancellor is considering a further tax on 'S' (that should also be plural but I cannot afford the tax).
If you mean 30 months, I think that's (damn! Taxed again even though it is not plural. Another example of legislation hitting innocent cases) a little harsh.
If however you mean 30 years, why have you not moved away so they cannot find you? We waited till she went to Uni and moved quickly to a 1 bedroom flat!

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Replying to whitevanman:
Hallerud at Easter
By DJKL
12th Dec 2019 19:17

We possibly ought to have done that but now too late, they came back- we are at least getting rid of the older one next year as he is getting married and there is hope with the younger as she has just completed her Msc, so maybe gainful employment may now beckon for her.

My plan was to run to the house in the above picture, which is in the middle of Sweden, catch is this Brexit stuff has come a few years too early so maybe somewhere like Sutherland will now need to suffice re travelling distance. (Though son's intended is from the USA so they may depart across the Atlantic anyway, 3,000 miles is a decent gap)

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Replying to DJKL:
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By whitevanman
12th Dec 2019 20:09

Ahh Brexit, "Bah Hamburg".
If the fish woman has her way, you folk from the northern lands, what will be known as the former colony of Her Majesty's Empire, will remain in the warm embrace of France et al.
But enough wild ranting, Sweden looks good and I doubt they have any difficulty knowing how to properly treat a stocking. I would take the chance but you may wish to wait till tomorrow when we may have a better idea (or not) about the likely future course of Brexit. My money's on a scoreless draw and the continued reign of chaos (and tax confusion).

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