CTM61615 - Close companies: loans to participators: repayment of - bed and breakfasting
ICTA88/S419 (4)
There is further advice on bed and breakfasting cases generally in EM8565.
You may find that a participator's indebtedness to the company is shown as reduced or eliminated immediately before the accounting date, or before the due date for payment of the Section 419 tax, only to be followed by a fresh loan or advance of the same or of a similar amount soon afterwards.
The temporary reduction in indebtedness is often brought about by the participator borrowing funds on a short-term basis from a third party such as a bank. But it may come from a transfer of assets to the company, or a transfer from another account with the company. You may come across other schemes for ‘bed and breakfasting’ the debt.
Where you think that you have found a case of bed and breakfasting you should get full details of the transactions and obtain as much factual evidence of the transactions and the accompanying arrangements as possible. As a minimum this should include copies of bank statements for the company and the relevant participators. CTIAA (Technical) will advise further on the types of information which should be obtained.
It is vital to establish whether the mechanics of the transactions/arrangements have been effected in the right order and on the right dates, and that book entries reflect genuine underlying transactions. For example, a cheque may not actually have cleared i.e. the funds have not actually been received in the company bank account, before the relevant date (the end of the accounting period or the 9 month point) and there can therefore be no argument that the loan is repaid at the appropriate point.
Even if the transactions have been carried out on the correct dates there are still possible challenges to any claim to S419(4) relief.
You should submit the papers to CTIAA (Technical) with a detailed technical submission for further advice on the arguments to run in specific cases.
CTIAA will consult and involve AAG if the argument will involve invoking the Ramsay approach.
