D3.401C Loans made by close companies to participators
This document discusses the specific anti-avoidance provisions that apply when a close company makes a qualifying loan/advance to a qualifying participator. The tax implications when such loans are repaid, waived/released are discussed at D3.401D.
The fundamental aim of all these provisions is to prevent participators enjoying the use of the income of a close company free of tax. Where it not for these rules, it would be possible for 'loans' to be made to participators from the close company and be allowed to remain outstanding indefinitely, be waived or written off.
It is important to note that in certain circumstances a loan may give rise to a charge under the disguised remuneration provisions, and these should be considered also; see E4.136A.
Making the loan
When a close company makes a loan to a participator it must pay tax (as if it were corporation tax) on the lower of the amount of the loan/advance outstanding at the end of the chargeable accounting period or the normal due date under self-assessment. For close companies that are not subject to the instalment payment regime, this is nine months and one day following the end of the chargeable accounting period1. The effect of this rule is that there is a tax charge on the loan/advance unless it is repaid within nine months of the end of the chargeable period.
The tax rate is linked to the dividend upper rate of tax, so a rate of