March 9th, 2021 / Insight posted in Articles

General Anti-Abuse Rule panel determines that planning to avoid tax on loan to shareholder doesn’t work

The General Anti-Abuse Rule (GAAR) panel has ruled that the GAAR applies to arrangements which seek to avoid a charge to tax under the “loans to participators” rules.

The panel’s decision was issued on 16 December 2020 and published on 4 February 2021.

The GAAR panel’s role is to consider cases referred by HMRC where it considers that the GAAR may apply. The GAAR is a general rule which aims to prevent abusive tax arrangements. The panel is independent from HMRC but the panel members are appointed by HMRC.

In this case, the taxpayer owned 95% of a limited company’s shares. In the year ended 31 December 2014, the individual’s loan account was overdrawn by £1,596,377. Normally, where closely held companies lend to “participators” (broadly, shareholders), there is a potential 25% tax charge if the amount is not repaid within nine months of the end of the accounting period.

This is commonly known as the “loans to participators” tax legislation. The company’s corporation tax return stated that the amount had been repaid on 30 September 2015. However, after checking the return, HMRC contended that the repayment was not effective and referred the case to the GAAR panel.

The GAAR’s published opinion notes that the taxpayer and the taxpayer’s advisers did not make any representations to the panel. The GAAR panel’s opinion is therefore based only on HMRC’s own representations.

The panel found that, in this case, “the entering into of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions; and the carrying out of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions.” The taxpayer will therefore be liable for the amount of tax at stake (25% of the loan amount, or £399,094) plus GAAR penalties of up to 100% of the tax at stake.

The features of the arrangements that the GAAR panel noted as being indicative of abusive arrangements include:

  • the establishment of a “Newco” by the individual, who sold his Newco shares to the taxpayer company for an amount equal to the balance of his overdrawn loan account.
  • the issue of almost £2 million of uncalled share capital in Newco.
  • a retained obligation whereby the individual taxpayer remained liable to pay a call on the new shares and the fact that this was used to support the valuation of the shares.
  • the repayment of the loan by way of transfer of the shares.

During the discussion, the GAAR panel considered whether targeted anti-avoidance rules within the loans to participators rules, introduced in 2013, applied to the arrangements.

While this was not the key matter for the panel to consider, its opinion indicates that the legislation does not necessarily catch the arrangements made in this case. It is likely therefore that following the GAAR panel’s opinion, the Treasury will introduce changes to the legislation to counteract this type of planning.

Advice from the experts

If you believe that you may be affected by this decision, or if you have clients raising this issue with you as their adviser, you should seek specialist advice without delay.  It is likely that the tax avoidance planning described here has been marketed to other businesses and it would be wise to seek a second independent opinion.

The old adage applies that if it looks too good to be true, it probably is.  In addition to the tax liability, the company faces penalties of up to 100% of the tax at stake. There may also be further personal tax and NIC liabilities for the director or shareholder that need to be considered on the beneficial loan terms afforded to them.

Moore Kingston Smith’s experienced tax advisers have a proven track record of successfully resolving tax disputes involving tax avoidance, so do contact us with any specific queries.