CTM61605 - Close companies: loans to participators: repayment of: general

ICTA88/S419 (4)

Where the whole or part of a loan or advance is repaid, (or released or written off on or after 6 April 1999), the company is entitled to relief from the tax chargeable under ICTA88/S419 or a proportionate part of it. The claim has to be made within six years from the end of the financial year in which the loan is repaid (or released or written off on or after 6 April 1999). The company can claim whether or not it is a close company at the time of the repayment etc. of the loan.

There is no requirement that repayment must be made by the person to whom the loan was made - payment by a third party on behalf of the debtor or payment in kind by a third party accepted in full discharge of the debt may constitute repayment for this purposes; see the comments of Millett J in Collins v Addies 65TC at page 201G).

Pre CTSA, if you do not have certified accounts showing that the whole or part of the loan or advance has been repaid (or released or written off on or after 6 April 1999), ask the company to certify that the repayment etc. has been made or ask for evidence of the repayment etc. before you authorise a discharge or refund of the Section 419 tax.

• For the date relief is due see CTM61610.
• For bed and breakfasting see CTM61615.
• For how relief is given see CTM61620.

Book entries

You need not object to repayment via book entries if those entries reflect the underlying reality of a transaction and they are properly recorded in the company's books (see the comments of Vinelott J in Minsham Properties Ltd v Price 63TC570 at page 585 beginning ‘there can be no doubt that a book entry can constitute payment’). But a repayment by this means should only be treated as taking place at the date the book entries are made and it is only at that date that the Section 419 (4) relief is due.

Credit of emoluments or dividends

Where the indebtedness of a participator who is also a director of the company is cleared by a credit of emoluments to the loan account, the guidance at EM8621 should be followed. For guidance on when such a credit can be counted as a repayment, you should adopt the principles on payment set out in SE42310 - SE42320.

The indebtedness may be cleared by a credit of a dividend to the loan account. In such cases, the guidance on Company Law at CTM20095 may be referred to. But for the purposes of Section 419 (4) the date of 'payment' of the dividend is not fixed by ICTA88/S834 (3).

That is because the question for Section 419 (4) purposes is not, when was the dividend paid but rather when was a debt repaid to the company. Section 834 (3) does not change the actual date of payment of the dividend. Until the dividend is actually paid, the debt to the company remains outstanding. Furthermore, the discharging of that debt to the company is not a purpose of the Corporation Tax Acts.

Which debt has been repaid?

If there have been a number of advances on a current account and a repayment is made, any parties involved can make a specific appropriation against a particular debt. Where no appropriation is made you should set the repayment against the earliest debt first, following the Rule in Clayton's Case (1816 MR Ch Vol 1, 572).

Assignment of debt

If the debt is novated it has been released and not repaid. No relief under Section 419 (4) is due if the novation takes place before 6 April 1999.

As a general rule in contract law, liabilities cannot be assigned because a person is entitled to know to whom he is to look for the satisfaction of his rights under a contract. A liability may be transferred with the consent of all the parties involved; but this is in effect the rescission of one contract and the substitution of a new one in which the same acts are to be performed by different parties. This is called a novation and it can only take place by agreement between all the parties.

As Millett J explained in Collins v Addies (65TC at page 201F):

'as a matter of law it is not possible for a debtor to assign a legal liability ... the transaction has to take the form of a novation ... that undoubtedly constitutes a release of the old debt and its replacement by an entirely new debt'.

Where there has been a novation, Section 419(4) relief would be due on the original debt, and ICTA88/S421 may apply. Depending on the facts, the new loan may also be subject to a new charge under Section 419.

If there has not been a novation, but a liability has been ‘assigned’ in some way see CTM61535.