What are the corporation tax rules for loans to participators?
Corporation Tax Act 2010 s455 imposes a tax charge on loans or advances of money from close companies to the following:
- A person who is a participator in the company
- A person who is an associate of a participator in the company
If the loan or advance is outstanding 9 months after the accounting period end the company must pay tax on the amount of the loan or advance. The tax is due from the company as if it were corporation tax chargeable for the accounting period in which the loan was made and is therefore due at the same time as the corporation tax is due.
The rate of corporation tax charged on loans to participators and advances made by close companies will be specifically linked to the dividend upper rate (32.5 per cent), from 6 April 2016. The rate prior to this was 25 per cent. The 32.5 per cent rate will apply to loans and advances by close companies on or after 6 April 2016. For accounting periods which straddle 6 April 2016 different rates will be applied to separate loans made or benefits conferred before, and on or after, 6 April 2016.
The reason for this change is to ensure that the rules continue to prevent individuals gaining an unfair tax advantage by taking loans (or making other arrangements to extract value) from their companies rather than remuneration or dividends.
Loans to participators are reported on the CT600A supplementary pages to the tax return.