Does a partnership arrangement create a s.455 charge?

Participator loans

Where your clients are connected with a close company, i.e. one under the control of five or fewer individuals, a tax charge under s.455 Corporation Tax Act 2010 (CTA) can arise. The charge is 32.5% of amounts that remain unpaid more than nine months after the end of the company’s accounting period, and is repayable once the loan is repaid.

This is often referred to as the charge on directors’ loans, but this is a red herring as there is no requirement for the recipient to be a director for the charge to apply, merely to have a share or interest in the capital or profits of the company. Any loans to participators are within the scope of the rules, as are loans to an associate of the participator. However, the loans to participators charge can also apply where the loan is made to a partnership if an indirect benefit arises.

Partnership connection

Prior to 2013, there were issues in applying the charge to arrangements where a company loaned money to a partnership that had a corporate partner. The rules were amended to prevent the avoidance of a charge simply by inserting a corporate partner in situations where at least one of the partners is also a participator in the lending company. This is clearly the case for your client, and so the proposed arrangement is within the scope of the charge.

Example. Polly owns 25% of the ordinary share capital of Acom Ltd. She’s also a partner in Bcom Associates, which is a limited liability partnership. Acom makes a loan to Bcom. The arrangement is within the scope of the directors’ loan tax charge.

Commercial purpose?

However, your client’s situation is slightly more complicated than this example. Her company, we’ll call it Xcom, will lend to two individuals who will use the money to lend to a partnership of which they and our subscriber are partners. The loan from Xcom is therefore doubly indirect, and is for genuine commercial purposes - but does that prevent the loans to participators tax charge from applying?

Unfortunately, what the other individuals do with the money they borrow from Xcom is largely irrelevant. The key factor is your client’s connection with the company lending the money and her association (through the partnership) with the individuals borrowing it. The charge can therefore apply if the loan isn’t repaid in time.

Exceptions

There are some limited exceptions to the loans to participators charge. For example, where the company’s business is in making loans. It also doesn’t apply to a debt relating to goods or services supplied by a company to a participator in the ordinary course of its trade or business unless the credit given exceeds six months or is longer than that normally given to the company’s customers.

Pro advice. There is also an exception where the loan doesn’t exceed £15,000 and the participator’s interest doesn’t exceed 5%, but this is unlikely to apply to your client’s situation.