In the first opinion it has given in favour of the taxpayer, the GAAR advisory panel found that arrangements involving repayment of participator loans through transactions involving group companies were reasonable.
The arrangements involved loans made by the company to its majority shareholder and director (M). These would be caught by the close company loans to participators rules (CTA 2010 s 455) should they not be repaid.
To avoid a tax liability arising under those rules, further loans were made by a subsidiary company to M and these loans were used to repay the original loans.
HMRC contended that this created a tax advantage for the company. The company argued that it made no difference whether M borrowed money from a third party or from another group company (the further loans were made on commercial terms) and that the new loans extinguished the amounts that would otherwise have been outstanding.
The panel did not find ‘contrived or abnormal’ steps, but noted that the arrangements potentially highlighted a shortfall in the legislation with the new loans clearing the director’s loan account balance ‘so there was nothing for the s 455 tax charge to bite on’.
The prospect of a tax charge would still exist in relation to the new loans, and the panel noted: ‘We do not see that there has been an extraction of value that, for example, escapes income tax’.
In conclusion, the panel identified the arrangements to avoid a s 455 tax charge as ‘tax arrangements’ but that:
those arrangements did not involve contrived or abnormal steps;
the arrangements exploited a shortfall in the relevant legislation, in that that legislation refers to a company rather than a group of companies; and
although the initial tax charge was eliminated, it was substituted by a later charge (on the new loans) and so there was no value passing out of the company to M.
As a result, the panel found that entering into the tax arrangements was a reasonable course of action.
In the first opinion it has given in favour of the taxpayer, the GAAR advisory panel found that arrangements involving repayment of participator loans through transactions involving group companies were reasonable.
The arrangements involved loans made by the company to its majority shareholder and director (M). These would be caught by the close company loans to participators rules (CTA 2010 s 455) should they not be repaid.
To avoid a tax liability arising under those rules, further loans were made by a subsidiary company to M and these loans were used to repay the original loans.
HMRC contended that this created a tax advantage for the company. The company argued that it made no difference whether M borrowed money from a third party or from another group company (the further loans were made on commercial terms) and that the new loans extinguished the amounts that would otherwise have been outstanding.
The panel did not find ‘contrived or abnormal’ steps, but noted that the arrangements potentially highlighted a shortfall in the legislation with the new loans clearing the director’s loan account balance ‘so there was nothing for the s 455 tax charge to bite on’.
The prospect of a tax charge would still exist in relation to the new loans, and the panel noted: ‘We do not see that there has been an extraction of value that, for example, escapes income tax’.
In conclusion, the panel identified the arrangements to avoid a s 455 tax charge as ‘tax arrangements’ but that:
those arrangements did not involve contrived or abnormal steps;
the arrangements exploited a shortfall in the relevant legislation, in that that legislation refers to a company rather than a group of companies; and
although the initial tax charge was eliminated, it was substituted by a later charge (on the new loans) and so there was no value passing out of the company to M.
As a result, the panel found that entering into the tax arrangements was a reasonable course of action.
