Lee Sharpe looks at how the scope of the ‘loans to participators’ tax regime can undermine legitimate company reorganisations.
Broadly, the ‘loans to participators’ regime was devised to discourage executives from taking loans instead of either salary or (even) dividends. Fundamentally, a loan is not earnings (and is not even income), so is not normally subject to income tax (see, for example, Williams v Todd [1988] 60 TC 727, excluding a loan or advance from PAYE earnings income (although the interest-free loan in that tax case was ultimately assessed, relatively modestly, for a ‘taxable cheap loan’ benefit-in-kind).
It follows that a company with sufficient funds could, in theory, afford to make substantial loans to its favoured employees or executives, year on year, and be quite relaxed about when it got repaid. Meanwhile, the individual would suffer no income tax. So, HMRC introduced the ;
