Loans to Participators

By | 27 September 2010

Many business owners operate more than one business, often through different legal entities. This can sometimes lead to unexpected and unwelcome tax consequences.

Companies and partnerships

Care is needed if one of the businesses is a close company and the other business is a sole trader or partnership, where the unincorporated business owner is a ‘participator’ in the company. A loan or advance from the company to the sole trader or partnership can result in a tax charge as a ‘loan to participator’ under CTA 2010, s 455 (previously ICTA 1988, s 419), subject to certain exceptions (see below).

Where a section 455 liability arises, the tax position could potentially be exacerbated by the imposition of penalties for failure to take reasonable care. In the case of close company loans to directors generally, HMRC’s guidance states (EIM8630):

“For the purposes of the Companies Acts, the accounts of a company are required to disclose loans or advances made to directors. Accounts that include loans or advances to participators under general headings, such as sundry debtors, may not be `incorrect’ accounts for tax purposes.”

“An offence of submitting incorrect accounts would, of course, have been committed if the loans had been, through fraud or negligence, wrongly described in the accounts by

  • inclusion of a participator’s loan account under `trade debtors’. This is at least negligent…”

However, what if the participator is also a partner in a trading partnership? If the debt arises from trading transactions between the company and partnership, it is difficult (for me, at least) to see how including the debt under trade debtors can be negligent (or a failure to take reasonable care). Nevertheless, I have seen cases where HMRC inspectors have argued that loans to participators should be separately disclosed in the company’s accounts, regardless of how the debt arose.


Of course, there is an obligation to notify HMRC about loans or debts to participators on the company tax return and to report any liability under section 455, unless certain specific exceptions apply. These include the following:

(a) Loans or advances in the ordinary course of a business carried on by a close company which includes the lending of money (s 456(1); and

(b) Trading and business debts – Where the ‘loan’ is a debt (ie for goods or services supplied in the ordinary course of the company’s trade or business), the charge does not apply unless the credit period exceeds six months, or is longer than the credit period normally given to the company’s customers (s 456(2)). 

In the context of a close company loan to an individual participator in a partnership, the above exceptions provide a potential escape from a section 455 charge. However, in practice the company will rarely be carrying on a money lending business. In addition, trade or business debts incurred by the unincorporated business will often exceed the credit period allowed to other customers. HMRC’s view is that a debt is incurred when goods are delivered of services performed, and credit runs from then until payment (CTM 61535; see also Grant v Watton 71 TC 333).

What if the lending company is a member of the partnership? Happily, HMRC will not contend that loans are within the charge under section 455 if there is a “genuine partnership”, which presumably means a bona fide commercial arrangement (see CTM 61515).

HMRC Toolkit

HMRC is releasing a ‘Directors’ Loan Accounts Toolkit’ to assist in the preparation of company box returns, in terms of potential section 455 liabilities and repayments. However, it remains to be seen how useful the toolkit will be when dealing with debts incurred by a related business involving a participator.

The above article is reproduced from ‘Practice Update’ (September/October 2010), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.