The above Committee recently submitted responses to two HM Revenue & Customs consultations: How to improve HMRC’s collection of debt: coding out and ‘Reform of close company loans to participators rules’.

As previously covered in Chartered Accountants Tax News, the close company consultation proposed 4 options for changing the rules on taxing loans to participators:-

Option 1 - maintain the current regime as is, including the three changes to the regime made as a result of Budget 2013.

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 tax 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).

Option 4 - similar to option 3 but requiring companies to calculate the charge annually on average amounts outstanding during the accounting period. This would mean that all close companies which make loans at any point during the accounting period, regardless of whether these loans are repaid, would be subject to the charge.

Both options 3 and 4 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. Options 3 and 4 would also result in a permanent tax charge.

The consultation response by the committee questions the need for change and is supportive of retaining the current regime as is stressing that HMRC have sufficient powers at their disposal to deal with any perceived abusive schemes or practices that may arise in the future.

The submission in relation to coding out stresses the importance of ensuring HMRC do not and will not in future use the coding out system to collect their measure of tax due on estimated amounts of investment income (e.g. property income). Coding out should only collect tax debt actually due and payable as determined through the self-assessment system. Thus the definition of debt is crucial where coding out is adopted.

Both consultation responses are available in full here