Annex 1: Minor changes in the law Change 30: Close companies: charge to tax on loans and advances to participators: exception for small amounts: section 456 and Schedule 2
This change brings into line with practice the statutory exception, for small amounts, from the charge to tax on loans and advances made to participators in close companies. It does so by extending the exception to include not only loans but also advances.
Section 419 of ICTA imposes a charge to tax when a close company (otherwise than in the ordinary course of a business carried on by it which includes the lending of money) makes any loan or advances any money to an individual who is a participator in the company or to an associate of a participator in the company.
Section 420(2) of ICTA makes an exception to this charge when the amounts are small. So far as relevant, it provides:
“Section 419(1) shall not apply to a loan made to a director or employee of a close company, or of an associated company of the close company, if –(a)neither the amount of the loan, nor that amount when taken together with any other outstanding loans which –(i)were made by the close company or any of its associated companies to the borrower; and(ii)if made before 31st March 1971, were made for the purpose of purchasing a dwelling which was or was to be the borrower’s only or main residence;exceeds £15,000 and the outstanding loans falling within sub-paragraph (ii) above do not together exceed £10,000; … and(c)the borrower does not have a material interest in the close company or in any associated company of the close company;but if the borrower acquires such a material interest at a time when the whole or part of any such loan made after 30th March 1971 remains outstanding the close company shall be regarded as making to him at that time a loan of an amount equal to the sum outstanding.”
Section 420(2) of ICTA makes no reference to advances. But it would be anomalous to exclude advances from section 420(2) of ICTA, because an advance to a participator in a close company would then be subject to the charge under section 419 of ICTA in circumstances in which, if the participator had received the money by way of loan, section 420(2) of ICTA would have sheltered it from tax.
In practice, therefore, HMRC apply section 420(2) of ICTA to loans and advances alike.
Section 456 and the saving for close companies in Part 11 of Schedule 2, which are based on section 420(2) of ICTA, bring the law into line with practice.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.