CTM61602 | Close companies: loans to participators and arrangements conferring benefit on participators: repayment of – repayment actually made?

It is important to establish whether or not the loan has actually been repaid, or, say, whether it is still outstanding, but owing from a different debtor. Please see CTM61605 also. For example, where book entries are made which mean that rather than an individual participator owing the money to the company, an associated or group company has replaced that original debtor, that does not constitute repayment. If the company which made the original loan has not received anything back then the loan/debt has not been repaid.

This will also apply where repayments of loans/overdrawn DLAs are said to have been effected by moving debtor balances around a series of group/associated companies but the original lender is never actually repaid. An increasing number of cases is being seen and they should be challenged.

This view is based on the Collins v Addies case, mentioned in CTM61600, which concluded that the substitution of a fresh debtor [for the original debtor] does not constitute repayment:

‘While payment by a third party on behalf of the debtor… may well constitute repayment or satisfaction and not a release for the purpose of these sections, I do not consider that the substitution of a fresh promise to pay by a third party can be similarly treated.’

It is also the case that HMRC are seeing cases where the shareholder takes increasing amounts of money from one or other company of his grouped or associated companies without ever having to repay any of it and purportedly without the company incurring a section 455 charge.

For example, a shareholder wholly owns company A, which in turns wholly owns Company B.

In AP 31 March 2019, the shareholder withdraws £2m from Company A. Just before the date 9 months after the end of the AP in which he borrowed the funds, on 28 December 2019, he borrows enough from company B to ‘repay’ Co A the amount outstanding at the end of its AP to 31 March 2019 (i.e.£2m).

His overdrawn DLA in company A is therefore cleared but his DLA in company B is now overdrawn to the tune of £2m. He continues to draw funds from company B throughout AP to 31 March 2020 and owes £6m by the end of that AP. On 23 December 2020, the shareholder borrows £6m from Company A to repay the amount outstanding in company B at the end of 31 March 2020.

This clears the 2020 DLA in Company B and creates an overdrawn balance on the DLA in company A in the AP to 31 March 2021.

This process continues in AP to 31 March 2021, such that at the end of that AP the shareholder owes company A £15m. The same process is repeated.

Clearly the shareholder continues to hold an increasing amount of company funds from a combination of Co A and Co B on which he has paid no income tax and on which it would seem that no S455 charge arises.

However, HMRC consider that, looking at the legislation as a whole, and its purpose, there is no repayment here, rather S455 should apply to the increasing amounts withdrawn from the companies.

Therefore £2m should be charged to S455 in Company A in AP1, £4m on Company B for AP2 and £9m on Company A in AP3.

Failing that Section 464A should apply, see CTM61570