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HMRC internal manual

Company Taxation Manual

Close companies: extended meaning of distribution: payments to participators - excessive amounts

Pensions, annual payments, rents, royalties, etc, may be paid in excessive amounts where the recipient is a participator or an associate of a participator in a close company. Where this is the case and part or the whole is disallowed in computing CT profits or management expenses because it exceeds a reasonable commercial consideration, the excess should be regarded, where appropriate (see CTM60660), as a distribution.

Accordingly the company will be liable to account for ACT on that part of the amount paid which is a distribution (for distributions made before 6 April 1999) and will not have the right, which it might otherwise have had, to deduct IT (including IT under PAYE).

The extended meaning of distribution CTM60520 should not be regarded as applicable to payments to participators which are normal commercial payments but which are disallowed for other reasons, for example, because they relate to a trade no longer carried on by the company.

As regards pensions, where it is claimed that any part disallowed as being in excess of reasonable commercial consideration should be regarded as earned income in the hands of the recipient, guidance can be obtained from Personal Tax.