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Loans to participators

Loans to participators

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I think this point has been discussed, but I can't find much in the way of commentary.

HMRC accept that crediting of the loan account with a dividend or bonus gives rise to an income tax charge and thus takes that repayment out of the anti-avoidance rules at s464C of CTA 2010.

But what about the case where the shareholder (or his partnership) raises a bona fide invoice to the company from one of his other unincorporated businesses, and that invoice is "settled" by way of off-set against the loan account? The raising of the invoice will of course give rise to an income tax charge, but the actual "repayment" of the loan, ie the offset, does not. So would s464C remain in point? And if so, does this also mean that dividends and bonuses need to be credited directly to the loan account (rather than taken to creditors at the time of declaration and subsequently set against the loan account)?

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25th Sep 2014 12:08

I would say that in the circumstances you describe the off-set constitutes payment on the date that it is effected.  As you mention partnership, I should add that you should take care before going down that route that the debtor's other partners are content to take payment that way (they won't necessarily be will they?).

Not sure what your last question means.  Yes of course a loan is not "repaid" by way of dividends or bonuses until the date on which those dividends and bonuses are credited to it.

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25th Sep 2014 12:23

I think

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By Ruddles
25th Sep 2014 12:42

Thanks, John


Though you haven't really answered my question as to whether the raising of an invoice and subsequent credit to the loan account can be treated as something giving rise to an income charge for the purposes of s464C(6). (By the way, it's a husband and wife partnership so the assumption is that she is happy with the arrangement - though I accept that it isn't necessarily so.)

My last question was whether taking the bonus etc to creditors first (which is when the income tax charge arguably arises) before offsetting results in a different treatment for the purposes of s464C(6) as opposed to crediting the bonus etc directly to the loan account. Because I think the argument is that if you take the former route the repayment does not give rise to an income tax charge because that charge has already arisen at the point of taking the item of income to creditors.

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25th Sep 2014 13:53

Sorry

Ruddles wrote:

Though you haven't really answered my question as to whether the raising of an invoice and subsequent credit to the loan account can be treated as something giving rise to an income charge for the purposes of s464C(6).

Sorry didn't realise you had to get round the bed and breakfasting rules as well.  Some people forget that cash is a perfectly good way of repaying a loan (provided the bed and breakfast rules don't bite).

You seem already to have had the answer from others.

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25th Sep 2014 12:50

Invoice creates income charge

The invoice from the partnership creates the income charge so the "payment" by reducing the director's loan should be sufficient for s455 purposes.

I think you are over-complicating things with the "what if it is taken to creditors first" question. Assuming full right of offset applies (which will be almost certainly be the case in OMBs for these situations) then there is a legal right to offset the debtor and the creditor immediately anyway. i.e. the right of offset means the loan is effectively reduced immediately, even if you show the two balances separately for some reason.

Not sure why you would want to complicate matters by taking bonuses etc to creditors first though.

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25th Sep 2014 12:58

It is in the legislation

CTA 2010, section 464C says that the bed and breakfasting rules do not apply to "a repayment that gives rise to a charge to income tax on the participator or an associate".

A dividend that is directly credited to the loan account does that.

The OP is not trying to complicate matters by taking things to another creditor first, that is the question. Given that the amount owed to the partnership starts off as one creditor and then gets offset (assuming that there is not an automatic right of offset, which is the more reasonable assumption).

What is the point of answering a question that you find too complicated, by accusing the OP of making it complicated? The complication is the frigging question.

My thoughts remain the same; take a punt and take your chances.

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25th Sep 2014 22:33

Never miss a chance to be rude, eh?

Portia Nina Levin wrote:
What is the point of answering a question that you find too complicated, by accusing the OP of making it complicated? The complication is the frigging question.
It is not that I find the question too complicated. It is that I think the questioner is making things too complicated for themselves by adding in the extra step. It is only this extra step (which in itself doesn't create taxable income as they believe is required) that is giving the OP trouble. If they didn't have that step, then that concern would go away.

But I find releasing a liability for the company to pay the directors in exchange for releasing an equivalent liability for the directors to pay the company very simple. I cannot see why the OP thinks is under the impression that is not a perfectly legitimate way of reducing an overdrawn loan account.

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By taxguru
25th Sep 2014 12:57

S.464C(6): This section does

S.464C(6): This section does not apply in relation to a repayment which gives rise to a charge to income tax on the participator or associate by reference to whom the loan, advance or benefit was a chargeable payment.

The problem with your query as follows:

1. It isn't a repayment. It's a payment for services rendered. 

2. The payment may give rise to income tax but not on the participator, but on the person providing the services (the same person though).

I would think that the legislation is basically referring only to extraction from the company.

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25th Sep 2014 13:01

Surprisingly

I think I agree with the above.

The purpose of the legislation is to catch the tax that might have been paid had the profits been extracted by a means other than a loan, so if you make an extraction that causes such a liability, it should not fall foul of the bed and breakfasting rules; otherwise it should.

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By Ruddles
26th Sep 2014 08:22

Stepurhan

I'm not making things complcated for myself at all. I haven't added in any extra step. I'm asking for advice on the appropriate tax treatment of a certain transaction that the client - not me - is proposing. I wasn't asking if there is a better way of doing things, I was asking for opinion of the treatment of the proposed transaction - whether you think it is unnecessarily complicated is completely irrelevant. On the question of crediting dividends directly to DLA or to creditors first, I was simply asking for an opinion as to whether this would affect the bed and breakfasting rules. Not because I'm intending to insert that additional step but merely because I'm interested in understanding exactly how the legislation would operate should that situation arise. If you're not interested in answering that point, that is your choice.

As for your second paragraph, you've missed the point again. I wasn't asking whether release of a liability is a legitimate way of reducing the DLA - I was asking whether or not such a reduction would fall within s464C(6). I'm not certain that there is a consensus of opinion on this.

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26th Sep 2014 09:59

How can you say such a thing?

stepurhan wrote:

Never miss a chance to be rude, eh?

How can you say such a thing. I was merely pointing out that you had missed the point.

I agree with the real ale person, that this thing is far from black and white.

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By Exector
26th Sep 2014 11:07

Not black & white- just so.

Yes it seems quite a few aspects of the new anti-B&B rules are less than crystal. Peter Rayney raised a similar point in a recent article on the topic concerning the difference between crediting a dividend and taking a cash dividend and paying in the cash. He interprets the legislation as strictly requiring the repayment itself to create the IT charge and in the latter route of course it does not. However, as he says "it is to be hoped that HMRC will adopt a purposive interpretation of this rule". Indeed, but it is always frustrating yet again to have legislation drafted on a key tax area where these sorts of basic uncertainty are created at the outset. I'd rather be able to rely on the strict words of the statute!

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