Mr DW and Mr IN are also equal shareholders of XYZ Ltd (“XYZ”). A senior manager of ABC, Mr PP is acquiring the shares of ABC via his company, FX Ltd for £1.5m. £500,000 of the consideration has been funded by Mr PP from his personal resources and the remaining is being funded by a loan from XYZ.“
Our client Mr DW and Mr IN are equal shareholders of ABC Ltd (“ABC”).
A: Scope of s459 CTA 2010
The loan made by XYZ could be within the scope of section 459 CTA 2010 (s.459), a provision which is intended to counter attempts to circumvent s.455 CTA 2010 (s.455). The provision can apply irrespective of the presence of any commercial reasons for the arrangements. s.459 states:
459(1) This section applies if under arrangements made by a person (P)–
(a)a close company makes a loan or advance which, apart from this section, does not give rise to a charge to tax under section 455, and
(b)a person other than the close company makes a payment or transfers property to, or releases or satisfies (in whole or in part) a liability of, a relevant person who is a participator in the company or an associate of such a participator.
459(2) Sections 455 to 458 and 464C and 464D apply as if the loan or advance had been made to the relevant person.
459(3) But this section does not apply if–
(a)the arrangements mentioned in subsection (1) are made by P in the ordinary course of a business carried on by P, or
(b)the total income of the relevant person includes, in respect of the matter mentioned in subsection (1)(b), an amount not less than the loan or advance.
459(4) If a company (C) controls another company (D), a participator in C is to be treated for the purposes of this section as being also a participator in D.
As DW and IN hold the entire shareholding of the company between them, XYZ is a close
company.
As the loan from XYZ is not made to a participator in XYZ or an associate of such a participator a charge under s.455 will not arise. Accordingly, the conditions set out at s.459(1)(a) CTA 2010 will be met. For a charge to apply, s.459(1)(b) also needs to be met.
Part of the sale proceeds (£1m) from FX Ltd, is being funded by way of a loan from XYZ and will indirectly find its way back to DW and IN. As such, a tax charge under s.459 can apply unless the exemptions in s.459(3) applies. Based on the facts presented, XYZ is not undertaking a money lending business so s.459(3)(a) cannot apply and as the receipt from the MBO will be capital,
rather than income, s.459(3) (b) will not apply. Therefore, a s.459 charge could apply.
Implications of s.459 CTA 2010
Where s. 459 applies the loan is treated as being made to the relevant persons (DW and IN)
and a charge will apply at the dividend upper rate in s.8(2) ITA 2007. The liability on this “deemed” loan is payable by XYZ by nine months and one day from the end of the accounting period in which the loan was made.
The tax charge under s.459 will be relieved where all or part of the loan is repaid or released.
Any repayment that occurs after the date payment is due will allow XYZ to claim a repayment of the tax associated with the value repaid. This repayment becomes due nine months from the end of the accounting period in which the repayment took place. This is subject to the “bed and breakfasting” provisions in Chapter 3B Part 10 CTA 2010.
Concluding remarks
It is not unusual in the case of an MBO that the payment of the cash consideration to the exiting shareholder is funded from cash reserves of the acquired company (Target Company). The funding could be through a dividend by the Target Company. However, declaring a dividend depends on whether the Target Company has sufficient distributable reserves. Insufficient reserves could result in funds being lent by the Target Company to the acquiring company to settle its debt (“upstream loans”). This is where s.459 could catch the arrangement as the participator is receiving a payment. A loan creditor is a participator as per s.453 CTA 2010 (as confirmed in HMRC’s manual CTM60130).
HMRC’s position on s.459 is outlined in their manual at CTM61550. They state that MBO “….it is exactly the type of arrangement which should be chargeable under Section 455. The company’s own money is being used to buy out the existing shareholders.”
Whilst there is no case law on the issue, s.459 adds an element of uncertainty to cases where there are no tax avoidance “arrangements” involved. These risks were highlighted by the Chartered Institute of Taxation in their submission to HMRC on 17 June 2024 (available here). Where tax avoidance is in point, s.464A CTA 2010 would be invoked.
At the time of writing this article, a response from HMRC has not been issued. As such, clients who are undertaking an MBO and are relying on an “upstream loan” from the Target Company should try to obtain a non-statutory clearance on the potential application of s.459.
