The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
This guidance note deals with the rules regarding payment of tax, and making claims for repayment of tax on loans to participators. The rules are also discussed in the Close Company Implications video.
For a summary of other tax implications of close company status, see the Close companies ― overview guidance note.
For loans or advances made by a close company, a tax charge of 32.5% (to increase to 33.75% from 2022/23 in line with the increase in the dividend tax rate ― see 'Build Back Better: Our Plan for Health and Social Care') will apply if the loan was made otherwise than in the ordinary course of a business carried on by it, which includes the lending of money to any of the following:
a person who is a ‘participator’ in the company or is an ‘associate’ of a participator
a trust in which a participator or their associate is trustee or potential beneficiary, or
an LLP or other partnership whose membership includes a participator or their associate ― this will catch, for instance, genuine commercial structures such as loans from related close companies to property development LLPs to fund new developments
The company must pay tax at 32.5% (33.75% from 2022/23) on the amount of the loan or advance that is outstanding nine months after the accounting period end in which it was made. This rate aims to prevent an unfair tax advantage from being obtained from the difference between the rate of tax on loans and benefits, etc to participators, and the rate of tax on dividends.
The tax is due from the company as if it were corporation tax chargeable for the accounting period in which the loan, etc was made and is therefore due at the same time as the corporation tax is due.
See Example 1.
The Taxation magazine queries ― loans to participators guidance note summarises recent queries in Taxation magazine which relate to
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