EM8565 - Close Companies: CTA10/Section 455 (Loans to Participators): Bed and Breakfasting

Section 455 is essentially an anti-avoidance provision creating a temporary tax charge designed to dissuade participators and their associates from extracting funds from the company in the guise of loans rather than as remuneration or dividends. If our action results in repayment of the loans to extinguish the charge the section has achieved its purpose.

Some participators may arrange a temporary repayment of the loan to try to circumvent Section 455 liability: the extracted funds are repaid and withdrawn the following day or shortly thereafter. Often these “bed and breakfast” transactions are carried out around the end of the accounting period to prevent the loans appearing on the company’s Balance Sheet but it may also be done around the date which is 9 months after the end of the accounting period as that is the trigger date for liability to the charge.

Where you suspect bed and breakfasting of loans you need to establish the facts. You should seek evidence that repayment took place and that any book entries reflect genuine underlying transactions. CT&VAT (Technical) can advise on the information to be obtained. If there is no such evidence you should contend there is Section 455 liability, or challenge a claim for relief under Section 458, on the grounds that viewed realistically no repayment of the loan was made.

Where you have cause to doubt that the repayment arrangements were intended to achieve genuine repayment of the loan you should submit cases at an early stage to CT&VAT (Technical) where bed and breakfasting is disputed and a contentious appeal may result. They will consult the Anti Avoidance Group (AAG) and advice will be given on the various arguments to run in appropriate cases.

You should consider penalties for inaccuracies when a temporary repayment arrangement is successfully challenged. This could be because of the incorrect accounts where the bed and breakfasting occurred around the accounting date, on the grounds that the Balance Sheet was carelessly or deliberately misleading. Where the loan was on the Balance Sheet but was claimed to have been repaid within 9 months of the end of the accounting period there could be a carelessly or deliberately incorrect claim for Section 458 relief.