A 'close' company is a company owned and controlled by 5 or fewer individual participators or controlled by any number of participators who are also directors.
Here, these terms are defined as follows:
Rules relating to loans from close companies are designed to prevent participators from enjoying tax-free funds disguised as loans from the company.
These rules can be found in section 419 in the Income and Corporation Taxes Act 1988. Hence, the liability is commonly referred to as 419 tax.
The rules apply to:
The rules can also apply where a company lends to its employee benefit trust.
The rules don't apply to loans to a director or employee of the company if:
Under tax rules, the close company must:
The liability to tax under section 419 is included in the company's Corporation Tax self-assessment, and it's payable under the normal corporation tax provisions.
When the loan has been repaid to the company, or when the company writes it off, the company can claim the section 419 tax back in its Company Tax Return. The person to whom the loan was made is liable to Income Tax in respect of it.
The loans by close company rules are subject to extensive detailed provisions. If your company is a close company and has made loans to participators, you should get professional advice on how this will affect the cash flow of your company.