Loans to participators

How to handle written-off payments to participators, directors and employees

If an ‘employment-related loan’ is released or written off the amount written off will be charged as taxable earnings of the borrower, unless otherwise taxable as income.

It would be otherwise taxable as income if:

  1. It was taxable under ITEPA 2003 s403 (compensation for loss of employment); or
  2. The loan was a capital sum within ITTOIA 2005 s633 (relating to settlements); or
  3. Where the lender is a close company in which the borrower is a director or an employee who is a participator (or an associate of a participator) under CTA 2010 s455. In this case the borrower is taxable based on the amount written off as if it were a dividend or other distributions (ITTOIA 2005 s415). Although the director or participator may be taxable instead of the borrower depending on the circumstances.

The term ‘participator’ is defined in CTA 2010 s454, subsections (1) and (2) of which state the following:

  1. For the purpose of this Part, ‘participator’, in relation to a company, means a person having a share or interest in the capital or income of the company.
  2. In particular, ‘participator’ includes:
  • A person who possesses, or is entitled to acquire, share capital or voting rights in the company,
  • A loan creditor of the company,
  • A person who possesses a right to receive or participate in distributions of the company or any amounts payable by the company (in cash or in kind) to loan creditors by way of premium on redemption,
  • A person who is entitled to acquire such a right as is mentioned in paragraph (c), and
  • A person who is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for the person’s benefit.