Revenue Note for Guidance

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Revenue Note for Guidance

437 Interest paid to directors and directors’ associates

Summary

This section is designed to counter the tax avoidance device of withdrawing profits in the guise of interest. The section treats as a distribution interest in excess of a reasonable limit paid by a close company to a director or an associate of the director where the director has a material interest either in that company or in another company by which it is controlled.

Details

(1) The term “interest” is defined in an “inclusive” way to encompass, in addition to what would normally be regarded as interest, any other consideration paid or given by the company for the use of money loaned or credit given.

(2) A person is regarded as having a material interest in a close company if the person, the person and associates of the person, or the person’s associates by themselves beneficially hold either directly or indirectly more than 5 per cent of the ordinary share capital of the company.

(3) The section applies where interest is paid in an accounting period by a close company to a director (or an associate of the director) of the close company paying the interest or of any company which controls or is controlled by that company. The director (or the associate) must have a material interest in the close company paying the interest or in another company by which it is controlled.

(4) If the interest paid in the accounting period to a director or his/her associate exceeds the limit provided for, the excess is to be regarded as a distribution.

(5) The limit is in the first instance applied as an overall limit to the total interest paid in the accounting period by the company. Where there are 2 or more recipients, the overall limit is to be apportioned between them according to the respective amounts of interest paid to them.

(6) The rate of interest to be applied in determining the overall limit for allowable interest is 13 per cent per annum. To obtain the overall limit this rate is applied to the smaller of —

  • the total of the loans, advances and credits for the accounting period or, in the case of fluctuating amounts, the average for the accounting period, and
  • the nominal amount of the issued share capital of the company at the beginning of the accounting period added to the amount of any share premium or similar account at that time.

The rate of interest may be varied by the Minister for Finance from time to time.

(7) The provision in section 436(7) which counters the possibility of 2 or more close companies entering into an arrangement to avoid interest being treated as a distribution is applied for the purposes of this section.

Relevant Date: Finance Act 2020