New measures announced

The widely utilised area of loans written off by close companies for the purpose of obtaining a corporation tax deduction for a dividend is being closed following new measures announced in Budget 2010.

Prior to the Budget announcement, where a close company (under the control of five or fewer individuals) makes a loan to a ‘participator’ (very broadly a shareholder) or to an associate of a participator, and subsequently releases or writes off that loan, under the loan relationship provisions the company may be entitled to a corporation tax deduction on the amount released or written off. In the hands of the participator the release is taxed in the same way as a dividend.

These rules broadly provide that the taxable and relievable credits and debits brought into account arising to a company under its loan relationships are those arising under generally accepted accounting practice (GAAP). A loan released or written off will normally give rise to an expense recognised in the company’s accounts under GAAP.

The new rules, which will be introduced in the Finance Bill 2010, will prohibit any deduction being brought in by the company for loan relationship purposes if the loan is wholly or partly released or written off. The income tax treatment of the person to whom the loan was made is unaffected by the measure.