Directors loan account s419 tax?

[GL]

A close company makes a loan to a director (no shares are held by the director).

Will s419 apply?...or as the director holds no shares will this disapply the application of the s419 tax?

Any comments will be welcome.

[Incredulum]

Paraphrasing the legislation (which is always dangerous, please go and read the original).

s419 (1) states"...makes any loan or advances any money to an individual who is a participator in the company or an associate of a participator, then shall be due from the company ... tax..."

s417 (1) a "participator" is, in relation to any company, a person having a share or interest in the capital or income of the company, and without prejudice to the generality of the preceding words includes -

a) any person who possesses or is entitled to acquire share capital or voting rights
b) any loan creditor
c) any person ... entitled... to receive ... distributions
d) any person entitled to secure that income or assets... will be applied... for his benefit.

(3) an "associate" means
(a) any relative or partner of the participator
b), c)... ... trustees... trust... estate

I recommend a read of s419 and s417 to make sure you do not feel you are caught.

BIK legislation applies though.

[GL]

Thank you for your response.

Unfortunately I think that the company will be caught under the s417-s419 legislation as the associate in question is related to a majority shareholding participator by way of being an adult step-child of that participator.

Thank you.

[Incredulum]

Does "child" include "step-child"? That the Housing Act specifically defines "child" as including "stepchild" makes me wonder.

S 113 of the 1985 Housing Act provides: “Members of a person’s family. (1) A person is a member of another’s family within the meaning of this Part if— (a) he is the spouse or civil partner of that person, or he and that person live together as husband and wife or as if they were civil partners, or (b) he is that person’s parent, grandparent, child, grandchild, brother, sister, uncle, aunt, nephew or niece. (2) For the purpose of sub-section (1)(b)— (a) a relationship by marriage or civil partnership shall be treated as a relationship by blood, (b) a relationship of the half-blood shall be treated as a relationship of the whole blood, (c) the stepchild of a person shall be treated as his child, and (d) an illegitimate child shall be treated as the legitimate child of his mother and reputed father.”

Ward LJ said

When Parliament wished to extend the meaning to cover de facto relationships, it did so expressly, for example by defining “spouse or civil partner” to include those who live together as husband and wife or as if they were civil partners. Absent such amplification, there was no room for extending the meaning of a “child” to cover a foster child

http://www.lawreports.co.uk/WLRD/2010/CACiv/SheffieldCC_v_Wall.html

[GL]

Dear Incredulum

Thanks again for your comments.

I reviewed the aspect of this matter in HMRC's CTM and found reference to step-brothers, or more to the point 'blood relations'.

CTM60150 - Close companies: tests: associates
ICTA88/S417 (3) - (4), ICTA88/S681 (4)
An associate of a participator is:

a person in any of the following relationships to the participator:
i) husband or wife,

ii) parent or remoter forebear,

iii) child or remoter issue,

iv) brother or sister,

v) partner.

Separated spouses should be regarded as associated with each other but divorced persons should not. Other relatives in (a)(ii) to (iv) should be regarded as associated only if there is a blood relationship, for example, half-brothers are associated but stepbrothers are not.



On the basis of the above as well as your very helpful responses I am hoping that they lend some weight toward the consideration of excluding a step-child as associated for this purpose.

[Incredulum]

Thank you.

Interestingly I mentioned this in passing to a lawyer friend who was of the view that if an act specifically defined brother as including step brother - as does the Housing Act, then that applied for the whole Act, however you could not necessarily rely on the same being true for another Act such as the Taxes Act.

[GL]

Dear Incredulum

As previously your comments have been very helpful; I will put it down to 'brain freeze' but it was not until you responded that I thought I would go and have a glance at the HMR&C manual...and as luck would have it they added the comment about the blood relation aspect...which has now been printed and filed in support of our view that s419 tax will not apply in this instance.