Section 455 loophole closed in the Budget
6th December 2024
Posted in Articles, Budget by Andrew Marr
A slightly below the radar announcement was made in the 30 October Budget relating to the closure of a loophole in section 455 tax planning. The tax charged under section 455 of the Corporation Tax Act 2010 applies to any overdrawn loan accounts of participators (broadly, shareholders) in close companies at the end of the company’s accounting period. The current rate of section 455 tax is 33.75%, which is equal to the higher rate of income tax on dividends. However, the tax is not due if the loan is repaid within nine months after the accounting period.
To understand the background to the announcement you need to go back to a GAAR (general anti-abuse rule) opinion published on 21 July 2022. This involved an arrangement which HMRC clearly hated but found that the legislation was not helpful in fighting their position. This arrangement broadly involved the following:
1. A shareholder borrows funds from his company which results in an overdrawn loan at the end of the accounting period.
2. Just before the nine-month deadline a subsidiary company puts the shareholder in funds to repay the parent.
3. The following year the situation reverses with the parent company putting the shareholder in funds to repay the subsidiary.
4. This cycle continues indefinitely and so no section 455 tax is paid by any company, despite the loan account increasing over time.
The GAAR hearing found that this planning was a reasonable course of action in relation to the relevant tax provisions. Essentially, they were concluding that – although the legislation may have been defective – there was no abuse of the legislation. This conclusion almost certainly led to the changes announced in the Budget.
Budget changes
The proposed legislation is quite difficult to follow but the gist of it (as I am reliably informed!) is to stop ‘repayments’ in the above circumstances being treated as repayments for the purposes of section 455. This means that the loan from the parent company in the above example would not be treated as being repaid and so the section 455 tax charge would still fall due nine months after the year end
Forbes Dawson view
Perhaps the most interesting point here is that shareholders have been allowed to use this trick for over two years since it was effectively endorsed by the GAAR panel. The GAAR legislation can clearly be a double-edged sword when HMRC fails in its attempt to use it i.e. because schemes are highlighted which may not have been commonly known about and, more importantly, they are shown to work. Although the Budget changes seem fair and reasonable, I will be keeping a closer eye on any GAAR decisions that go the taxpayer’s way in the future…
