CTM61550 - Close companies: loans to participators: aggregating accounts
ICTA88/S419, ICTA88/S419 (4)
The question of whether a company has separate accounts, or a single joint account, with the same participator or different participators, is one of fact. The application of Section 419 follows the actual arrangements between the parties, as evidenced, amongst other things, by the treatment of the transactions in the company’s accounting books and records, and the general law on debts and repayments. Facts will not be disregarded simply because other arrangements mayhave produced different results (see the comments of Browne-Wilkinson J at p.432B in E V Booth (Holdings) Ltd. v Buckwell 53TC425.
It may be that, for commercial purposes, certain transactions are kept separate and this is achieved by the use of distinct accounts, even for the same participator. One account may be secured, the other unsecured; one account may bear interest, the other may be interest free; and so on. If, for whatever reasons, the parties choose to keep the various forms of indebtedness separate, then liability under Section 419 will arise if the participator is indebted to the company on any account. This will apply all the more where the accounts are held by different persons.
The position is however different if the facts show that there is genuinely a joint account. It would be unusual to find two directors operating a genuine joint account unless they were husband and wife or otherwise closely related.
Where there is a suspicion of manipulation to attempt to show genuinely separate accounts as a single joint account, you should obtain the full facts.
You should not accept that separate accounts should be aggregated or ‘netted off’ for Section 419 purposes. There is statutory authority for this approach in the plain words of Section 419 (1), which impose a charge to tax when the close company makes ‘any loan or advances any money’, that is, the company is liable on the full amount of a loan or advance, irrespective of whether the same participator has a credit balance on another account with that company.
The legislation is widely drawn, and this is necessary if we are to catch the mischief at which the provisions are aimed. We do not, however, have to show there was an avoidance motive behind the transactions, and we take this line on not aggregating separate accounts to ensure that the proper charge arises when any loan or advance is made or when a debt is incurred.
Genuine book entries may be made so that a credit balance is used to repay a debit balance, but this is not the same as saying the two accounts can be ‘netted off’. It does not mean that Section 419 liability only applies to the net debit balance. Rather, the liability is on the full amount of the debit balance and relief is available under Section 419 (4) (see CTM61605 onwards). The date of repayment for Section 419 (4) purposes is the date the book entries are made.
In an investigation case, where there have been extractions, it is necessary to make notional debits to the participator's account. For that purpose only, accounts may be amalgamated (see EM8620). The reason for this is the difficulty of allocating the notional debits to different accounts in an equitable way. But it will have no bearing on any existing Section 419 liability.
