From today, close companies will no longer be able to claim a tax deduction when a loan to a participator (or their associate) is released or written off (BN39).
Previously, the Corporation Tax rules governing corporate debt (the “loan relationships” rules) had allowed close companies (subject to anti-avoidance rules) to deduct such loan write-offs against their CT liability. In practice such loans had to satisfy the “unallowable purpose” test, and it is understood that HMRC have been taking an increasingly aggressive stance against tax relief on such loans.
Many SME tax advisers have taken the view that trying to claim tax relief on close company loan write-offs was a waste of time - indeed, at a recent CPD seminar, LexisNexis’ Chris Jones stated that “it is likely ... that the tax treatment on the company would be to add back the deduction from profits in the CT computation”. It seems that perhaps some tax advisers, maybe larger firms whose clients had more to gain (or lose), have been pushing this point to the limit and HMRC has now decided to call time on the whole issue.
There is no change to the income tax treatment of the person to whom the released or written off loan was made. It continues to be treated as a distribution.
BN41 also promised "significant restructuring" of the legislation covering transactions in securities. A wider range of companies will be covered and a new income tax advantage test and new exemption covering fundamental changes in ownership of close companies will be introduced.