At Budget 2013 the Government announced that it would consult on options for reforming the rules which govern loans made by close companies to participators. That consultation has now been opened and opinions are invited on the suggestions therein, including alternative options, by 2 October 2013.

The consultation document presents four differing options as follows:

Option 1 - maintain the current regime as is

This includes the three changes to the regime made as a result of Budget 2013 as follows:

• An anti-avoidance provision preventing companies and participators benefitting from the provisions which give relief for repayments where the repayment to the close company is not ‘genuine and enduring’ – known as “bed and breakfasting”.
• An amendment bringing loans and advances from close companies to partnerships and trusts into the regime where, broadly, an individual who is a participator in the close company is also a partner in the partnership or a trustee or beneficiary in the trust.
• An anti-avoidance provision which imposes a tax charge equivalent to the section 455 charge if, under tax avoidance arrangements to which a close company is a party, a benefit is conferred on a participator. This now applies the rules to other forms of value extraction with an avoidance purpose.

Option 2 - increase the tax rate but retain the structure and operation of the regime (rate of 40% suggested in the consultation).

Option 3 - replace the current Section 455 charge and repayment system with a lower rated but permanent tax charge (suggested at for example 5% to reflect that each loan could be charged in multiple accounting periods).

At the end of each year the close company would consider the loan position with the participator and a tax charge would arise on the balance of any outstanding loan(s). If the loans were repaid during the nine month period before the tax was due, relief would be given for the charge on the portion repaid. This process would repeat at the end of each accounting period until the loan was repaid.

The tax would not be repayable to the company when the loan was repaid. For short accounting periods, the tax charge could be reduced in proportion with the number of days in the accounting period.

Option 4 – similar to option 3 but requiring companies to calculate the charge annually on average amounts outstanding during the accounting period.

All close companies which make loans at any point during the accounting period, regardless of whether these loans are repaid, would thus be subject to the charge. This would be a significant departure from the current rules where only those close companies which make loans to their participators which are not repaid within nine months of the end of the accounting period must pay any tax.