One item that may have passed you by this week is cryptically described as “Corporation Tax: rate of tax for the loans to participators charge” in the Budget Policy papers.
The change represents a 30% increase in the rate of corporation tax applied to loans to participators that remain unpaid nine months after the year end. (Section 455 CTA 2010)
What is the change? Here’s what the policy statement says:
“The measure will ensure that the rate of tax chargeable under the loans to participator rules continues to mirror the dividend upper rate, following the changes to dividend taxation from April 2016. The rate of tax charged will increase from 25% to 32.5%.”
Clients with overdrawn director’s loans should be advised. The policy statement confirms:
“Legislation will be introduced in Finance Bill 2016 to link the rates of tax chargeable in sections 455 and 464A to the dividend upper rate. It will mean an increase in the rates from 25% to 32.5% for all relevant loans made or benefits conferred by close companies on or after 6 April 2016.”
If loans remain unpaid, this will constitute a significant cash flow drain for trading companies until the tax paid can be recovered when the loans are repaid.