CTM61505 - Close companies: loans to participators: general
ICTA88/S419 (1), FA89/SCH12
Where a close company makes any loan or advances any money to an individual who is:
- a participator in the company, or
- an associate of a participator,
then, unless the loan or advance was made in the ordinary course of the close company's business and that business includes the lending of money (see CTM61520), the close company is due to pay tax under ICTA88/S419.
Section 419 applies only if the company is a close company at the time the loan or advance is made.
- the tests for determining whether a company is a close company, see CTM60100 onwards,
- the meaning of loan or advance, see CTM61535,
- the definitions of participator and associate of a participator, see CTM60107 onwards,
- the exclusion of certain loans to directors or employees, see CTM61540,
- reciprocal arrangements, see CTM61670 to CTM61680,
- extension of ICTA88/S419 to loans by controlled companies, see CTM61690 to CTM61750,
- the application of ICTA88/S419 where both the lender and borrower are insolvent, see CTM61530.
For loans made in accounting periods ending before 1 July 1999 FA89/SCH12 Part I gives the power to call for such information as you think necessary for the purpose of ICTA88/S419 (see CTM60400).
For CTSA periods the information powers are in FA98/SCH18/PARA27.
Rate of Section 419 tax
For accounting periods ending before 6 April 1999, the tax is due ‘as if it were an amount of CT’ equal to such fraction of the loan or advance as corresponds to the rate of ACT in force for the financial year in which the loan etc. is made. Thus if, for example, the ACT rate at the time the loan is made is 25 / 75, the tax payable on a loan of £7,500 would be £7,500 x 25 / 75 = £2,500.
Following the abolition of ACT, the rate of tax to be applied to ICTA88/S419 liability for accounting periods ending on or after 6 April 1999 is 25%.
Although the company is charged to tax under ICTA88/S419 (for accounting periods ending before 6 April 1999) ‘as if it were an amount of CT…’, this does not mean a loan or advance is a distribution of the company or income in the hands of the recipient.
Similarly, although tax is charged at the ACT rates for accounting periods ending before 6 April 1999, it is not ACT and cannot be set off against the company’s CT liability. Nor is it CT and therefore it cannot be reduced by CT losses.
As regards the:
- assessment, collection, etc of amounts within ICTA88/S419 for loans made in accounting periods ending before 1 July 1999 see AC4450, AC4500 onwards and AC4814 onwards,
- due date of payment of tax and application of CT provisions - see CTM98200 onwards.
Loans made on beneficial terms to a participator, or an associate of a participator, who is a director or an employee may give rise to liability on the individual under the earnings from employment provisions in addition to any charge on the company under ICTA88/S419 (see SE26101).