EXPLANATORY NOTE

This clause amends the provision under which interest is paid on tax overpaid by a company. It ensures that the correct amount of interest is charged when tax paid in respect of a loan made by a company controlled by a small number of shareholders to one of those shareholders is repaid where, on or after 6 April 1999, the loan is released or written off.

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Subsection (1) amends section 826(4) ICTA 1988, which applies where interest is payable on a repayment of tax charged under section 419 ICTA 1988 on a loan made by a company controlled by a small number of shareholders to one of those shareholders. The amendment ensures that, for loans released or written off on or after 6 April 1999, section 826(4) applies in the same way as it does on the repayment of a loan.

Subsection (2) provides for the amendment to have effect in relation to the release or writing off the whole or part of a debt on or after 6 April 1999.

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Clause 80 to 84, and Schedule 11, correct omissions, and make the minor and consequential amendments, to remedy minor technical defects that have been identified since the introduction, by Finance Act 1998, of core provisions for CTSA, payment of corporation tax by instalments and the abolition of ACT. A summary of these major changes is provided in the Background to the note on Clause 80.

Section 419 applies only to close companies, that is companies under the control of five or fewer participators, or of participators who are directors. Broadly, a participator includes any person having a share or interest in the income or capital of the company, including shareholders.

Section 419 applies to a loan or advance if it is made to an individual who is a participator in the company, or to an associate of a participator, but not to a loan made in the ordinary course of a business which includes the lending of money.

When a close company makes a loan of this kind, it must account for tax calculated at the rate of 25 per cent of the amount of the loan. Following changes made by paragraph 24 of Schedule 3 to Finance Act 1998, the tax is repaid to the company not only when the loan is repaid, but also, from 6 April 1999, when the loan is released or written off.