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HMRC internal manual

Enquiry Manual

Close Companies: Settlement: What to include

A settlement on a company may include

  1. Corporation Tax
  2. Income Tax or ACT (up to 5 April 1999) on relevant payments or distributions not accounted for
  3. liability in respect of loans or advances EM8620+
  4. tax due under ICTA88/S747 (profits of Controlled Foreign Companies)
  5. any Employer Compliance liabilities that you have agreed with EC colleagues are to be brought into your settlement
  6. Interest
  7. Penalties.

If the omitted profits are covered by losses, the only CT consequence may be a reduction in the losses remaining available for relief.

Employment income liability may also arise for directors under ITEPA03/S175 on a beneficial loan EIM26101. In a non-extractive settlement, EM8601, liability attaches to a director from the date the loan was made, until such time as the debt has been repaid.

In an extractive settlement, EM8601, the debt incurred by the director in respect of the extractions is not a loan until there is an intention that it be repaid. No ITEPA03/S175 liability arises before the date from which that intention can be shown to exist. It would be unusual to find evidence that the company or director agreed at the time the money was taken that it would be repaid. Intention to repay will normally occur when the terms for settlement are being discussed.

In such situations the resulting re-writing of the director’s loan accounts EM8620 does not produce S175 liability on a director for the period covered by the enquiry. Liability under ITEPA03/S175 attaches to the directors in extractive settlements from the date the intention to repay can be shown to exist until such time as the debt has been repaid. If this liability is disputed, you should make a report to contact link before taking the matter further.

Where you are unable to conclude a settlement with the company because

  • it is clear that the CT and CTA10/S455 tax will not be paid because the company is insolvent or defunct (and you cannot obtain a “joint and several” offer and you are not using the employment income route), or
  • the company is in liquidation and it has been confirmed by Enforcement and Insolvency Services (Insolvency Section) that there is no prospect of the liquidator recovering the funds to meet the CT and CTA10/S455 liabilities either by realisation of company assets or from the directors,

you should pursue ITEPA03/S175 liability for the enquiry period in cases involving extractive irregularities, if it can reasonably be maintained that all the shareholders tacitly or otherwise consented to the misappropriation at the time they took place.

There is no 2 out of 3 rule for CT, S455 and S175 liabilities. Whether liability arises must be decided applying the statutory charging provisions and Departmental guidance for each separately.