Close companies: take care

In a busy day for tax reform, draft legislation has been published that removes an exception to the targeted anti-avoidance rule (TAAR) in the close company rules for arrangements made as of today. This is one of a number of announcements in support of the Government’s stated objective of a “fair tax system”.

The “loan to participator” rules are a long-standing set of rules designed to prevent closely controlled (e.g. owner-managed) companies deferring tax on dividends by making loans to shareholders instead. Fact patterns in scope of these rules range from simple to highly complex, and the changes announced today could make those examples at the more difficult end of the spectrum even more complex.

Under existing rules, loans or advances by close companies to their participators give rise to a tax charge for the close company of 33.75% on amounts outstanding nine months after the end of the accounting period in which the amounts were advanced (the s.455 charge).

However, relief is available for s.455 charges to the extent that the loan or advance is repaid (repayment relief).

The rules also contain a TAAR, which essentially broadens the scope of the s.455 charge to capture tax avoidance arrangements to which a close company is party and result in a benefit being conferred on a participator (or their associate) in that company. This operates as a catch-all provision to capture benefits not already taxed on the company under the main s.455 rule or on the participator (or their associate) under income tax rules and is potentially much wider in scope than the main loan to participators rule.

Unusually, repayment relief is also currently available even in situations where the TAAR applies.

New measures announced in today’s Budget will remove the availability of this relief for arrangements made on or after 30 October 2024 that fall within the TAAR.

In particular, the policy paper states that this measure is intended to target specific arrangements using groups of companies where new loans are made and repaid in a chain in such a way that no s.455 charge arises on the increasing amounts extracted.

While the intended application of the change may be limited, as the TAAR has much broader application (it is not limited to loans), close companies should take great care in ensuring that they are not party to otherwise commercial arrangements inadvertently falling within these provisions. This could in some cases present a challenge for close companies given the complexities inherent in applying a “main purpose” test in relation to tax avoidance.