Details of the Schedule
2.Part 1 and paragraph 1 introduce amendments to Part 10 CTA10.
Insertion of new Chapters 3A and 3B
3.Paragraph 2 inserts two new Chapters into Part 10 of CTA10:
Chapter 3A which imposes a tax charge when close companies enter arrangements with a tax avoidance purpose; and
Chapter 3B which dictates how certain repayments and return payments are treated.
Both of these new Chapters are treated as having come into force on 20 March 2013 as announced by the Government on that day.
Amendments to section 455 CTA10
4.Paragraph 3 amends section 455 of CTA10. Broadly, under that section, if a close company makes a loan or advance of money to a relevant person (i.e. an individual or a company acting in a fiduciary or representative capacity) then there is a tax charge (known as “section 455 tax”) of 25 per cent of the amount of the loan or advance.
5.In addition to the charge on loans or advances to relevant persons, the amended section 455 puts beyond doubt that loans and advances to certain trustees and certain limited liability partnerships (LLPs) or other partnerships are subject to the section 455 tax, as follows:
Trustees: where there is a loan or advance to trustees of a settlement in which at least one trustee or beneficiary (or potential beneficiary) is a participator (or an associate of such a participator) in the close company making the loan or advance.
LLPs or other partnership: where at least one of the partners is an individual and that individual is a participator (or an associate of an individual who is a participator) in the close company making the loan.
Example 1:
An individual (X) owns 100% of the shares – and is therefore a participator - in a close company (C Ltd).
X and C Ltd set up an LLP with themselves as the partners.
C Ltd makes a loan to the LLP.
A close company, C Ltd, has made a loan to an LLP in which there is an individual partner who is also a participator in the close company, so the loan is chargeable to section 455 tax on the close company (unless one of the exceptions in sections 456 or 461 CTA 2010 applies).
6.As announced by the Government on 20 March 2013, the amendments to section 455 CTA10 have effect from that date.
Amendments to section 459 CTA10
7.Paragraph 4 ensures that from 20 March 2013, the restrictions on relief introduced by new section 464C and new section 464D also apply to any loans or advances treated as made to a relevant person under section 459 CTA10.
New Chapter 3A – charge to tax: other arrangements
8.Paragraph 5 inserts the new Chapter 3A.
Section 464A Charge to tax: conferring benefit
9.Section 464A imposes a new tax charge if during an accounting period a close company is party to arrangements under which benefit is directly or indirectly conferred on an individual who is a participator in the close company or an associate of such a participator.
10.Section 464A describes such “arrangements” for the purpose of this section.
11.Section 464A also contains provisions which:
set the due and payable date for any tax chargeable under s464A;
introduce a rule so that for the purposes of section 464A, a participator in a company which controls another company is to be treated as also a participator in the controlled company; and
ensure section 464A only applies if the conferral of the benefit which would be chargeable does not give rise to a section 455 tax charge.
Example 2:
X, an individual, is a participator in a close company (C Ltd).
C Ltd and X are partners in a partnership. Under the partnership agreement, 80 per cent of the profits are allocated to C Ltd and charged on C Ltd at the corporation tax rate.
C Ltd leaves its profits undrawn on capital account in the partnership and X draws on them.
There is a benefit conferred on X because X has received funds from C Ltd, a company in which X is a participator and there was no section 455 charge on C Ltd and no income tax charge on X. If the funds had been transferred directly from C Ltd to X, they would have been chargeable to income tax (if transferred as remuneration or a dividend) or section 455 (if they were transferred as a loan).
Example 3:
Using the structure described in Example 2, C Ltd could alternatively have drawn its profit share from the partnership but reintroduced some or all of the funds into the partnership as a capital contribution. At the point X then draws on these funds and seeks to argue that a tax charge does not arise when those funds are withdrawn, a benefit is conferred upon X in a similar way as for Example 2.
Section 464B Relief in case of return payment to company
12.Section 464B provides relief similar to that in section 458 CTA10 for loans.
13.If there is a section 464A tax charge on a benefit conferred, section 464B provides relief where the value is returned to the close company as a payment and without consideration being given for the payment.
14.Section 464B has time limits and claims rules which mirror those of section 458 CTA10.
Commencement of sections 464A and 464B
15.The provisions of sections 464A and 464B have effect for any arrangements to which the close company becomes a party on or after 20 March 2013.
New Chapter 3B: Treatment of certain repayments and return payments
16.Paragraph 6 inserts the new Chapter 3B into Part 10 of CTA10.
17.Under section 458 CTA10 and the new section 464B, relief is available to a close company if the loan or amount of the benefit is repaid to the close company. Chapter 3B dictates the treatment of certain repayments where the amounts cannot be described as genuine or enduring repayments.
Section 464C introduces two rules which, if either applies, treat the affected repayment as being made in respect of a matched chargeable payment:
Rule One: the 30 day rule
18.Subsection 464C(1) applies where a close company has amounts outstanding (either a loan or advance, or the conferral of a benefit, which gives rise to a charge under sections 455 or 464A CTA10) and during any period of 30 days it:
receives repayments which:
repay a payment chargeable under sections 455 or 464A CTA2010;
have not been matched with a chargeable payment under s464C previously; and
total at least £5,000; and
makes new chargeable payments (which have not previously been matched with a repayment under section 464C):
in an accounting period which is later than the accounting period in which the original chargeable payment was made;
to the same person or their associate.
19.For subsection 464C(1) to apply, the repayments and new chargeable payments may be in the same accounting period, but the new chargeable payments must be made in a later accounting period than the original chargeable payments.
20.In these circumstances the repayments are treated as repayments of the new chargeable payments so far as the amount of the repayment does not exceed the amount of the new chargeable payment. Repayments are then available to set off against the original chargeable payments only to the extent the repayments are in excess of the new chargeable payments.
21.Subsection 464C(2) determines which new chargeable payments should be taken into account when considering the 30 day period – new chargeable payments which are repaid within the 30 day period under consideration are not taken into account.
Rule Two: Arrangements rule
22.Section 464C(3) applies if the 30 day rule does not apply to a repayment and the repayment is made under arrangements which result in a further amount being paid to the participator. In these circumstances, the repayment is to be treated as a repayment of the new chargeable payment (so far as the amount of the repayment does not exceed the amount of the new chargeable payment).
Example 1:
A Ltd lends a participator £20,000 which is still outstanding at the end of the accounting period. 35 days before the section 455 tax becomes due and payable, the participator receives a further £25,000 payment from the company. The original £20,000 is repaid using £20,000 of the £25,000 new loan.
It is likely in this situation that the repayment of £20,000 would be treated as a repayment of £20,000 of the new £25,000 loan so the original loan would be treated as not repaid and so the section 455 tax would become due and payable.
Example 2:
B Ltd lends a participator £30,000 which is still outstanding at the end of the accounting period. During the nine month period leading up to the due and payable date, the full amount is repaid using a 40 day bank loan. The bank loan is repaid using a further loan of £30,000 from the company.
There are clear arrangements here and so the original loan would be treated as not repaid and so the section 455 tax would become due and payable unless a further repayment was made.
Provisions applying to both the 30 day rule and the Arrangements rule
23.Subsections 464C(4) and (5) ensure that repayments and new chargeable payments are not matched more than once under these tests. If a repayment and chargeable payments have been matched under a previous operation of either subsection 464C(1) or subsection 464C(3), the repayments and chargeable payments will in effect be ignored for further operations of those subsections. Further, for any repayment/chargeable payment, consideration should be given as to whether the rule in section 464C(1) applies before consideration as to whether the rule in section 464C(3) applies.
24.Subsection 464C(6) applies to disregard any repayments which give rise to an income tax charge from consideration by this section. This means that the majority of dividends and remuneration presented purely as book entries can be ignored when applying section 464C.
Other features of Chapter 3B
25.Subsection 464C(7) and (8) allow the de minimis limits to be effectively varied by Treasury Order.
26.Section 464D provides for supplementary provisions for 464C including the assessments necessary to give effect to the restriction of relief and for when a person must amend their tax return to give effect to this restriction.
27.Subsection 464D(5) treats benefits conferred (under section 464A) and relief for payments relating to such benefits under section s464B as loans and loan repayments for the purposes of section 464C.
Commencement of Chapter 3B
28.As announced by the Government on 20 March 2013, the provisions of Chapter 3B apply to repayments (relating to section 455) and return payments (relating to section 464A) made on or after that date.
Part 2 of Section 79: Other Amendments
29.The Taxes Management Act 1970 (TMA70) is amended to ensure provisions which apply under this Act to the un-amended Chapter 3 also apply to the amendments and new Chapters introduced by this Schedule. The Finance Act 1998 (FA98) is amended at Schedule 18 to include the charge under section 464A in provisions which currently apply to the section 455 tax charge and to include amendments to the penalty provisions to take account of the new restrictions on relief. The amendments to the TMA70 and FA98 are treated as having come into force on 20 March 2013.
30.The Income Tax (Trading and Other Income) Act 2005 is amended so that if a relevant loan which was made to an LLP or partnership is released or written off, the person liable to income tax under section 417 of that Act is any partner who is an individual. If there is more than one individual, the liability is apportioned between the partners who are individuals on a just and reasonable basis.
31.The amendments under paragraph 14 have effect for loans or advance made on or after 20 March 2013.
