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HMRC internal manual

Company Taxation Manual

Close companies: tests: loan creditor

CTA2010/S453 (1) to (4) (formerly ICTA88/S417 (7), (8), (9))

For the purpose of (b) of CTM60107 (and for certain control tests, see CTM60230) ‘loan creditor’ means a creditor in respect of any redeemable loan capital issued by the company or in respect of any debt incurred by the company being a debt:

  • for money borrowed or capital assets acquired by the company, or
  • for any right to receive income created in favour of the company, or
  • for consideration the value of which to the company was (at the time when the debt was incurred) substantially less than the amount of the debt (including any premium thereon).

A person is not a participator merely because he or she is a normal trade creditor of the company.

As the normal debenture issued by a company is redeemable, debenture holders are participators.

Payments to be made under a hire purchase agreement would not normally be regarded as part of the company’s loan capital. This is because under the usual hire purchase agreement there will be no debt for capital assets acquired by the company. The terms of the typical agreement make it clear that the assets remain in the ownership of the hire company until the final instalment is paid. The payments not made in order to acquire a capital asset, but rather they are rent for the use of the asset.

An example of a sum owing in the circumstances described in the second bullet above is where a person contracts to make annual payments to the company, in return for a capital sum due at some later date. The capital sum is treated as loan capital of the company and the person will be a participator.

A person who has a beneficial interest in a debt or loan capital, in respect of which some other person is the loan creditor, is to be treated as a loan creditor to the extent of that interest (CTA2010/S453 (3) (formerly ICTA88/S417 (8)).

It should be borne in mind that CTA2010/S1000 (1) (E) (formerly ICTA88/S209 (2)(d)) provides that the interest etc on certain loans is a distribution. As regards such loans, the creditor is in any case a participator as he or she ‘possesses a right to receive or participate in distributions of the company’ (see (c) of CTM60107).

Banking business

Where a company has borrowed money from a person, that person is a participator unless the person carries on the business of banking and made the loan in the ordinary course of that business (CTA2010/S453 (4) (formerly ICTA88/S417 (9)). There is no statutory definition of what constitutes carrying on a banking business (the definition of bank in CTA2010/S1120 (formerly ICTA88/S840A) does not apply to CTA2010/S453 (formerly ICTA88/S417)) so we rely instead on the common characteristics of banking established in the (non-tax) case of United Dominions Trust Ltd v Kirkwood 1966 2 QB 431 and endorsed in Hafton Properties Ltd v McHugh 59TC420.

If you have any queries on whether a person is carrying on a business of banking, or whether a loan is made in the ordinary course of that business, please consult CTIS (Technical).