What is the charge?
Part 3, Chapter 7 ITEPA 2003 sets out the provisions that deal with taxable cheap loans to employees. In order for chapter 7 to apply, the loan needs to be an ‘employment-related loan’ which is defined in section 174 ITEPA 2003. It requires that the loan is made to an employee or a relative of an employee (s174(1) ITEPA 2003). As to whether the client or her father is an employee, one should also consider whether there is any scope that either of them could arguably be a director as defined under s67 ITEPA 2003 (see also HMRC Manual EIM20200). If the criteria in s174 ITEPA 2003 is not met, then there would be no benefit in kind charge under Chapter 7.
However, although not chargeable as a benefit in kind on the employment front, we need to consider whether s1064 CTA 2010 would be in point to trigger a distribution charge.
S1064 CTA 2010 deems the close company as having made a distribution to a participator if the company incurs expenditure in the provision of certain benefits for them. Benefits in this case would include the interest-free loan that the company has made.
Firstly, we should look to see whether the client’s father would fall within the definition of ‘participator’. S1069 CTA 2010 extends the meaning of participator to include associates of the participator for the purposes of s1064 CTA 2010. The client, owning 25% of the shares in the close company will be a participator under s454 CTA 2010 and as her father will fall within the meaning of ‘relative’ (s448(2)(b) CTA 2010), he will be an associate of a participator. Therefore, there will be a distribution deemed to have been made by the company.
Who is charged?
The company is treated as making a distribution to the participator (s1064(2) CTA 2010) and any references to a participator in s1064 also include an associate of a participator (s1069(1)). This would suggest that the distribution is treated as if it was made to the father. We need to keep in mind that this is from the company’s perspective and for the purposes of the Corporation Tax Acts.
For the charge to income tax on distributions, s385 ITTOIA 2005 sets out the person liable to the charge as any person whom any distribution is made or treated as made, or the person receiving or entitled to the distribution. This indicates that the income tax charge is likely to be levied on the father as the recipient. HMRC manual page SAIM5020 also suggests that HMRC are of this view as well.
How much is charged?
The quantum of the deemed distribution is determined using the same method we would use to ascertain the beneficial loan charge amount for an employee/director under Chapter 7, Part 3 ITEPA 2003. This is not the loan amount that has been advanced to the father, but the cash equivalent of the benefit that is charged to tax.
Of course, should the participator make good the full amount of the cash equivalent as determined above, then there would be no amount treated as a distribution to the participator.
In summary, there is no benefit in kind charge applicable to the client, however, to the extent the expense is not made good, there is a deemed distribution charge on the father. As an aside, although not part of the query, I should mention that the company should consider any liability under s455 CTA 2010 if not already done so.