Clause 76 - Close companies

Part of Finance Bill – in a Public Bill Committee am 3:30 pm ar 11 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of David Gauke David Gauke The Exchequer Secretary 3:30, 11 Mehefin 2013

Clause 76 introduces schedule 28, which closes three loopholes exploiting perceived weaknesses in the legislation taxing loans made by close companies to individuals, known as participators, who have an interest or shares in the company. Tax avoidance is both unfair and unacceptable to the vast majority of taxpayers, who pay the right amount of tax. The schedule amends part 10 of the Corporation Tax Act 2010, to close down that avoidance with immediate effect from the Budget announcement on 20 March.

A close company is one owned and run by only a small number of participators, who have an interest or shares in the company. In certain circumstances, close companies are subject to a tax charge on loans they make to their participators. That charge is appropriate because a loan is a way to extract value from a company, albeit under the terms of a loan. Some people have attempted to circumvent legislation to deliberately avoid the tax charge. In many cases, the same people also seek to use the arrangements to avoid or minimise income tax and national insurance contributions. The vast majority of close companies and their participators are compliant and pay any tax due on value extracted from companies by the participators. Those who seek to exploit the rules gain an advantage, and that position is simply unfair.

The clause amends the legislation in three ways: first, the tax charge will apply to all loans made to a partnership or trust in which at least one partner, trustee or beneficiary is a participator in the close company making the loan. Unlike before, that is regardless of whether there is a corporate partner or trustee in the structure. Secondly, the clause introduces a targeted, purposive anti-avoidance rule to catch payments that are not strictly loans, which currently fall outside the rules for loans. The final change requires repayments of loans to remain with the company for at least 30 days, which will reduce scope for manipulation. Further, if there are arrangements in place to withdraw funds at the time the repayment is made, relief from the tax will be denied even if the new payment is outside the 30-day period.

The Government propose amendments 65 to 69 and schedule 28 to make final changes to the rule. Concerns were raised that the Bill did not focus closely enough on the policy objective, and that the new rules may unintentionally catch genuine commercial practice, rather than solely avoidance behaviour. The amendments will target the Bill more narrowly, and remove ambiguity by more clearly defining which loans and repayments should be taken into account in applying the first test on how such repayments should be treated. The second test will focus on arrangements that have been made to replace the original loan with a new loan when the repayment was made.

Amending the rules in such a way will aid both business and HMRC with their application. It will relieve small businesses, more closely focusing the new rules on the anti-avoidance function, and reduce any uncertainty and operational difficulties for both businesses and HMRC. We introduced the legislation in March immediately to counter avoidance of the tax charge. The changes will ensure that it works effectively in practice.

Most small businesses that incorporate are close companies. Although the tax charge on loans applies to them, if relevant, the vast majority will be completely unaffected by the closure of the loopholes. In many cases, the rules are being exploited by affluent individuals using avoidance arrangements to reduce their tax bills. The loophole closures are designed to minimise any undue burden on compliant businesses.

HMRC is pursuing an increasing number of those avoidance cases; some avoiders are seeking alternative ways of reducing their tax bills as loopholes are closed down elsewhere. The changes are just one element of the significant crackdown on avoidance by the Government to ensure that companies and individuals pay their fair share of tax. They complement what we are doing around avoidance using partnerships and intermediaries, will yield £270 million over the scorecard period, and further protect revenue; that is important protection for the Exchequer.

Although the rule changes go a long way towards countering avoidance of the tax charge on loans to participators, there is scope to strengthen the regime. Therefore, alongside the announcement, the Government have said that they will consult on options for broader reform of the regime with the aim of creating a fairer  and simpler system that will provide the opportunity for businesses, representative bodies and other stakeholders to present their views.

Attempts to exploit perceived weaknesses in the legislation relating to the taxation of loans made by close companies to their participators can give rise to an unlevel playing field between compliant and non-compliant taxpayers. Schedule 28 counters such avoidance, and results in companies and individuals paying the right amount of tax. I commend the clause to the Committee.