CTM61600 - Close companies: loans to participators and arrangements conferring benefit on participators: repayment of - general

CTA10/S458 and CTA10/S464B

Where the whole or part of a loan or advance is repaid, released or written off, (or a return payment is made in respect of an amount chargeable under CTA10/S464A) the company is entitled to relief from the tax chargeable under CTA10/S458 (or CTA10/S464B) or a proportionate part of it. The claim has to be made within four years from the end of the financial year in which the loan is repaid, released or written off. The time limit was six years for repayments made in financial years ending before 1 April 2010.

The claim can be made on the return (page CT600A), where appropriate, (see CT61610). The L2P form is available to help ensure that all of the information required to enable a repayment to be made is provided either with the return or separately.

Where the loan is made and repaid (NB repaid, not aggregated or netted off, see CTM61565) within the same accounting period, such that there is no outstanding amount at the accounting period end date, then, provided the provisions of CTA10/S464C do not apply, the loan and repayment do not need to be included on the company’s tax return; the claim for relief is implicit, though the loan is still within the charge to CTA10/S455, or CTA10S464A as appropriate. The ‘claim’ is part of the workings in arriving at the figures to be included in the accounts and computations submitted to HMRC which show the credit balance at the end of the year.

However where this is part of a bed and breakfasting arrangement (see CTM61615), that is where there has been a further loan and the repayment was only temporary (or where the loans are aggregated/netted off, see CTM61565), then the preceding paragraph will not apply. Such a loan should be included on the company’s tax return, as it will be treated as outstanding by CTA10/S464C.

The company can claim the repayment of the tax whether or not it is still a close company at the time of the repayment, release or write off of the loan or the return payment.

However, it is important to establish that the loan has actually been repaid. Following the legislative changes in 2013, companies and their advisers are seeking new ways around the legislation, see CTM61602 and CTM61604 for examples of some cases in which HMRC consider that the purported repayment should be challenged.

There is no requirement that repayment must be made by the person to whom the loan was made - payment by a third party on behalf of the debtor or payment in kind by a third party accepted in full discharge of the debt may constitute repayment for this purpose; see the comments of Millett J in Collins v Addies 65TC at page 201G).

Book entries

You need not object to repayment via book entries if those entries reflect the underlying reality of a transaction and they are properly recorded in the company's books (see the comments of Vinelott J in Minsham Properties Ltd v Price 63TC570 at page 585 beginning ‘there can be no doubt that a book entry can constitute payment’). But a repayment by this means should only be treated as taking place at the date the book entries are made and it is only at that date that the Section 458 relief is due.

Credit of emoluments or dividends

Where the indebtedness of a participator who is also a director of the company is cleared by a credit of emoluments to the loan account, the guidance at EM8621 should be followed. For guidance on when such a credit can be counted as a repayment, you should adopt the principles on payment set out in EIM42310 to EIM42320.

The indebtedness may be cleared by a credit of a dividend to the loan account. In such cases, the guidance on Company Law at CTM20095 should be referred to. But for the purposes of Section 458 the date of ‘payment’ of the dividend is not fixed by CTA10/S1168 (1).

That is because the question for Section 458 purposes is not, when was the dividend paid but rather when was a debt repaid to the company. Section 1168(1) does not change the actual date of payment of the dividend. Until the dividend is actually paid, the debt to the company remains outstanding.

Which debt has been repaid?

Where there are a number of loans/advances on a single account, any parties involved (participator and/or company) can specify against which debt they want to set the repayment. Where they do not specify, you should set the repayment against the earliest debt first following the rule in Clayton’s Case (1816 MR Ch Vol 1,572).