Corporate debt ― frequently asked questions

Produced by Tolley
Corporate debt ― frequently asked questions

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Corporate debt ― frequently asked questions
  • What happens to the write off of a loan relationship by a close company to a shareholder?
  • Family members, the control test and connected persons
  • Release of a connected companies loan relationship
  • Can an unincorporated entity (eg a partnership) be connected to a company?
  • Is providing a guarantee a loan relationship?
  • Is the payment of expenses by one group company on behalf of another a loan relationship?
  • How do the intra-group transfer rules apply?
  • When can an unconnected loan relationship be released without a tax charge arising?
  • Release of inter-company account that is a mixture of cash advances (loan relationships) and charges or recharges for goods and services (other money debts)
  • More...

The following scenarios are intended to illustrate how the various rules governing corporate debt will apply in a variety of real-world situations. The scenarios are intended to be more complex than the most simple situations but not uncommon.

For a general overview of corporate debt, including the loan relationships and derivatives regimes, see the Corporate debt ― overview guidance note.

What happens to the write off of a loan relationship by a close company to a shareholder?

When a close company makes a loan to a participator (whether or not the participator is also an employee or director), a tax charge can arise for the company.

Anti-avoidance provisions ensure that loans (and other extractions of value) made by a company to a participator via an intermediary also fall within this charge.

If such loan is subsequently waived or written off, the close company can reclaim the tax charge.

However, there is no debit for loan relationship purposes as a result of the write off, even though this may not be a connected parties relationship.

In addition, there could be income tax (and potentially NIC) implications for the participator if they are an individual.

On the waiver or write off of the loan, a savings or investment income tax charge arises for the participator. If the participator is also an employee or director the amount written off will be treated as earnings and subject to PAYE, with both income tax and class 1 NIC due.

See the Loans to participators guidance note for a further discussion of such loans.

Family members, the control test and connected persons

In order to control a company for the purpose of the connected person test in the loan relationship rules, it is necessary for a person to be able to secure that the company's affairs are conducted in accordance with their wishes. This can be through a shareholding or the possession of voting power (in the company or any other company) or by virtue of powers

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