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HMRC internal manual

Company Taxation Manual

Close companies: loans to participators: extended meaning of loan: debts

CTA10/S455 (4), CTA10/S456 (2)

Cases in which a close company is to be regarded as making a loan to any person include where:

  • the person incurs a debt to the close company (CTA10/S455 (4) (a))
  • a debt due from the person to a third party is assigned to the close company (CTA10/S455 (4) (b))

However, they do not include cases where:

  • the person incurs a debt to the close company, and
  • that debt is incurred for the supply by the close company of goods and services in the ordinary course of its trade or business, and
  • the credit given by the company to that person does not exceed six months or the period of credit normally given to the company’s customers, whichever is the shorter (CTA10/456 (2))

The presumption is that a debt is incurred at the time the goods are delivered or the services are provided and credit runs from that time until payment. This view was endorsed by the High Court in the case of Grant v Watton 71TC333, where Mr Justice Pumfrey said at page 8:

In my judgment the word “incurred” is apt to describe the point in time at which the debtor became legally committed to some future expenditure, albeit unascertained. If the debtor knows in respect of a service which he has received that he will have to pay for that service on some date in the future, if he has not already done so, I believe that in the ordinary sense of the words he has incurred a debt, albeit that the debt will not be due until that future date and although its quantum may not be capable of ascertainment…

CTA10/S455 (4) (b) is not aimed at every ‘assignment’. It applies where a third party assigns a debt to the close company for consideration. In law, a debtor cannot assign a liability; it has to be the creditor who does the ‘assignment’. Therefore the sub-section only applies where, for example:

  • Company A, a third party, loans money to Mr X who is a participator in Company B, and
  • Company A then assigns the debt owed to Company B ‘for consideration’

Mr X, the debtor, now has to pay his debt to Company B rather than Company A. Company A has received consideration rather than the debt. As, contractually, Mr X is still obligated to Company A (there has not been a novation), he has not incurred a debt to Company B so Section 455 (4) (a) could not apply - Section 455 (4) (b) was introduced to cover this eventuality.

Where a liability is ‘assigned’, and the arrangements do not amount to a novation (see CTM61605), Section 455 (4) (b) cannot apply. In the above example if Mr X and Company B come to an agreement that the company rather than Mr X will pay the debt to Company A, Section 455 (4) (b) does not apply because the creditor has not assigned it. There is no novation as not all parties have agreed. However if a debt arises when Company B makes payments to Company A (e.g. Mr X’s loan account becomes overdrawn), Section 455 (4) (a) could apply, or the payments might amount to remuneration or a distribution in the hands of Mr X. The exact outcome will depend on the facts.