By Daniel Hunter

HMRC has published a review of the rules for close company loans to participators, which could affect around 1.3 million limited companies.

It is a common practice for ‘close’ companies — that is companies that are controlled by five or fewer people - to lend money to shareholders or associates such as family members.

During this year’s Budget, the Government announced that it would consult on options for reforming these rules after raising concerns about potential loopholes that could be exploited as part of this type of agreement. HMRC suggest that these proposed changes would protect some £45 million of revenue over the next five years, and generate £270 million.

The consultation document, importantly, ‘seeks views on whether to reform the rules’ and not simply on how.

"Although in the current economic climate the tentative nature of the proposals is understandable, unfortunately the consultation document is lacking in any meaningful data to support the apparent concern expressed regarding abuse," Joe Burnie, Baker Tilly’s Head of Tax said.

"The proposals are fundamentally flawed in a number of respects and we will be raising this when we set out our views formally to HMRC. The argument for change is not at all convincing. While the £1 billion of outstanding loans to participators appears to be a significant amount this represents a very small figure when averaged across the 1.3 million companies affected.

"Approximately 500,000 of these have no employees and are likely to comprise a significant proportion of the target businesses. The financial affairs of these ‘one-man’ companies are often closely linked to that of the owners, and it is not until the end of the accounting period that it is possible to determine whether the individual owes the company money or vice versa. Whilst there is an obligation to analyse business cash flows regularly during the accounting period, imposing a further requirement will add significant administrative burdens."

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