Why does this fail?

An individual runs his own profitable UK close trading company.

He has quite a lot of spare personal cash floating around, outside of the company, on which he receives interest. He injects a chunk of this money into his company by way of loan, and the company pays him interest of about the same amount that he was getting before. So personally he is left in a neutral position for Income Tax purposes.

The company has no particular need for the cash, so it would not be possible to argue that the money is applied for the purposes of the trade. Not to worry, that just means that it would be a non-trading loan relationship on which the deficit is treated by s.457 CTA 2009. But that is subject to s.459 which allows for sideways relief of non-trading loan relationship deficits before carrying forward the unclaimed balance. So the company still gets CT relief on the interest.

OK, the company probably may henceforth be an investment company and lose the ER on the shares etc, but if he is thinking of selling up all he would need to do is withdraw the loan more than a year before sale.  And of course there would be BPR issues, but may be happy to take that on board. It is not as if he would have been getting BPR on the cash while outside the company anyway.

Sounds too good to be true, which means that it probably is. But why?

Thanks

With kind regards

Clint Westwood