Representation Tax 2013/11

The Northern Ireland Tax Committee of Chartered Accountants Ireland wishes to comment on the above consultation document published on 9 July 2013.

We have considered options 1 to 4 as outlined in Chapter 4 of the consultation. Overall we are in favour of option 1 - maintaining the current regime.

The strengths and weaknesses of the current regime are outlined in detail in chapter 3 of the consultation under the following specific headlines:-

1. That the regime should be an effective deterrent to the employment income avoidance behaviour at which it is targeted

We agree that the close company loans to participators rules are an anti-avoidance provision and their purpose is to deter close companies from transferring value to their participators. However we do not agree that the current rate of 25% can result in a lower overall tax bill for the participator simply because the company can claim back any section 455 tax paid when the loan is repaid. In such scenarios the company is not permanently deprived of the funds loaned nor is the participator permanently enriched. So it follows that in scenarios where the loan is repaid, it is right that the Section 455 tax is repaid to the company. As HMRC recognise in the consultation, in such scenarios the participator does not have a lasting use of the money and the funds loaned are unlikely to be a substitute for permanent income of the participator.

In addition, not only does the original loan suffer Section 455 tax but, where the participator is also an employee, an additional permanent income tax liability at the participator’s marginal rate of income tax (current maximum of 45%) can arise under the beneficial loan provisions in Chapter 7 ITEPA 2003 (for loan amounts greater than £5,000). A class 1A National Insurance liability (currently 13.8%) is also suffered by the employer company. There are also administrative requirements to be fulfilled included completing the relevant end of year Reporting of Expenses and Benefits forms. Where the participator is not an employee, a permanent income tax charge is suffered on the deemed distribution (beneficial loan) at the effective dividend rate (current maximum of 30.56%) under Section 1064 CTA 2010. Such loans can therefore prove expensive when the holistic tax position is considered, particularily where the loan life stretches over several accounting periods.

2. That the regime should be sustainable - itself robust against avoidance;

Under this heading, the consultation states that the requirement for new avoidance rules for the loans to participators regime in the Finance Act 2013 highlights that section 455 tax is itself a target for avoidance behaviour. The consultation further states that where section 455 tax is ineffective, an avenue may open to extract money through structures designed for avoidance.

We would make two points in relation to the above

1. The fact that there have not been changes required to the regime in the period 1999–2013 is indicative that the loans to participator rules are not a target for widespread avoidance behaviour.
2. That HMRC have sufficient powers at their disposal to target any future avoidance behaviour by using the Disclosure of Tax Avoidance regime to identify specific schemes, implementation of anti-forestalling legislation for specific schemes identified or (as a last resort) by challenging abusive behaviour under the new General Anti-Abuse rule which came into operation on 17 July 2013.

3. That the regime should not be inhibitive of genuine commercial transaction

At paragraph 3.1 of the consultation document, the Government recognises that there are commercial reasons for transferring value between close companies and their participators on a temporary or contingent basis.

One particular common scenario is when this occurs following a decision to delay the declaration of a dividend until the company’s performance for the year is known and distributable reserves can be safely determined. In those scenarios the loan is repaid within nine months once the dividend is declared and no Section 455 charge arises.

The consultation recognises this as a common and efficient practice which does not amount to tax avoidance by the participator because income tax at the higher dividend rate is paid on the dividend. In addition, for the period the loan is outstanding and no interest is charged by the company on the loan, a permanent tax charge will also arise under the aforementioned beneficial loan provisions with the company also incurring a class 1A NIC liability (where the participator is an employee). The deemed distribution rules for non-employee participators result in a permanent income tax charge at the effective dividend rate.

Moving to a permanent (lower) tax charge under options 3 and 4 would inhibit such genuine commercial transactions. Option 4 would be particularily inhibitive as it would still impose a tax charge even if the loan has been repaid because the charge would arise on average amounts outstanding during the period even if those had been repaid by the period end. There would be no nine month window to allow repayment and remove the Section 455 charge entirely.

4. That any changes to the current regime should be fair and simple (and not administratively burdensome for business or HMRC)

The current regime has been in place without significant changes since 1999. It is well known and its administrative requirements are generally well embedded and practised by UK companies.

The proposal to impose a permanent tax charge under option 4 would prove even more administratively complex. The financial affairs of many ‘one-man’ companies are generally closely linked to that of their owner, and often it is not possible until the end of the accounting period to determine whether the individual owes the company money or vice versa. Whilst there is an obligation to analyse business cash flows regularly during the accounting period, imposing a further requirement would add a significant additional administrative burden particularily where there are many transactions.

From an administrative perspective, we would suggest that form CT600A would benefit from a refresh as Section 3 in particular can be confusing. In addition CT600A should also deal with scenarios where repayment of Section 455 tax is due for loans made in earlier return periods. This would remove the need to make a separate claim for relief which can often be rejected or held by HMRC until the current period’s corporation tax position is established.

Conclusion

It is our view that the consultation document is lacking in any meaningful data to support the apparent concern expressed regarding abuse. We further cite that HMRC have sufficient powers at their disposal to deal with any perceived abusive schemes or practices that may arise in the future.

The argument for changing the current regime is not convincing. Whilst the £1 billion of outstanding loans to participators appears to be a significant amount this represents a very small figure when averaged across the 2.455 million companies registered in the UK at the end of 2011.

On the basis of all the above, we propose the regime stay as it currently is.

Do not hesitate to contact Brian Keegan or Leontia Doran should you require anything further.

Yours sincerely,

Paddy Harty

Chairman

Northern Ireland Tax Committee

Chartered Accountants Ireland

Source: Chartered Accountants Ireland. www.charteredaccountants.ie