Very often one company (A) will loan another company (b) some money. There is no issue with this, as long as there is a loan agreement, and both the lending company and receiving company has minuted the same to legislate the loan.
The main problems arise when the loan cannot be repaid.
Where both companies are connected, i.e. have the same directors/ shareholders, or at least one person has significant influence on both (as defined in s466 Corporation Taxes Act 2009), if the loan cannot be repaid, then a Loan waiver will result in a credit in the borrowing company and debit, no relievable loan relationship debit or taxable credit arises (as explained in s354 and s358 of The Corporation Taxes Act 2009).
The waiver of such a loan will be passing of value out of lender company and so this will be distribution (out of taxable income). Consequently, the shareholder(s) will be deemed as ultimate beneficiaries, and will account for tax as dividend/ distribution income, being the person(s) entitled to such distributions. However, if the loan becomes irrecoverable, then no such waiver would be required, but would cast doubts on the ‘bona fide’ of the loan itself.
Such loans between connected parties will not result in a charge under the loans to participator’s rules under s455 of Corporation Taxes act 2010, but will be caught out by anti avoidance rules under s464A. HMRC own internal manual (CTM61580) suggests that they would only be concerned with a scenario where the loan ends up in hands of the shareholder(s) or an individual(s) who are an associate of the shareholder(s).
The tax treatment is the same as Lender company paying out dividends, which are then used to inject funds into the borrowing company.
Normally a formal loan agreement will be required as a ‘prima facie’ evidence of an existence of loan arrangement placing an obligation on the borrowing company to repay the debt.
If a controlling shareholder/ director simply transfers funds from one company to another, this is not an evidence of a loan, but rather the shareholder/ director using the company’s funds for personal reasons. Such transactions would be posted as director’s loan account and not an inter-company loan. Hence, the necessity for an evidential paper trail for the existence of a loan to minimise possible enquiry from HMRC.
If you are involved in inter-company loans and need tax advice on this please get in touch with JMS Accounting.