A director used (indeed overused) his current account with the company to the extent that it was frequently overdrawn and sometimes by sizeable amounts.
HMRC quite rightly wanted to tax him on the benefit of having these loans interest free. No problem there, and unforunately no real problem in them not agreeing to the interest on overdrawn balances being reduced by interest on credit balances, although we did try.
HMRC insisted that the interest was charged on the average balance - calculated by adding together the balance on 6 April year one and the balance on 5 April year two and dividing by 2. They would not accept a more specific (and correct, excel) calculation because we were out of time to claim that.
it seems to follow that if our director can arrange for his overdrawn current account to be repaid for the period 4 April to 7 April in each year there wlll be no benefit whatever the size of the loan during the rest of the year.
Sounds too good to be true - and they ignored our request to confirm this!
Patrick
Replies (7)
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Classic!
The simplified calculation is based on opening and closing balances and the number of complete tax months the loan was outstanding. Your method would reduce the interest by two tax months, but no more. I'm also given to understand that your approach does not work for Section 419 interest charges.
Unlikely to work
You could do that, but then HMRC would exercise their right under s183 to insist on the alternative method if you did. So it is unlikely to work.
I am interested in replies to this thread.
S.183(2) imposes a deadline for notifying the alternative treatment, as permitted by S.183(1)(a) (HMRC direction) or S.183(1)(b) (taxpayer election). S.183(2) makes no distinction between S.183(1)(a) and S.183(1)(b), from which I deduce that HMRC is subject to the same time limits as the taxpayer. The taxpayer has no particular reporting requirements (that I can tell), other than a Related Party note in the financial statements disclosing the maximum overdraft in the period. There may be a requirement to fill in the S.419 pages to the CT return, but even that could be negated by briefly bringing the account into credit while spanning the accounting year end as well as on the tax year end.
So, the question is, how likely is HMRC to pick up the implications from the note to the financial statements (or is there something else to consider)? Is there perhaps a P11D reporting requirement even if you compute no benefit under the standard method?
Clint
The P11d also needs to disclose the maximum outstanding balance during the year as well as opening and closing balances. I assume that this is to stop people doing exactly what's being discussed.
Yup, agree, James
Section H of the P11D only exempts disclosure if it never went over £5K(and then there would be no benefit anyway).
What if interest is charged to director's loan account
If the interest were computed and debited to the director's loan account, crediting interest received, would a P11D entry be required?
Perhaps
But only if the interest is actually paid. Section 175 ITEPA will not permit offset of interest until and unless it is physically paid to the company.
EIM 26250 states that the interest must have been paid under an obligation to pay interest and I believe that the Revenue take the view that a company director entering into an agreement with his own company to pay interest on a loan would in most cases be an artificial arrangement.
However, Section 175 ITEPA merely states that interest paid for a year reduces the benefit in kind charge, it makes no such restriction on the interest which can be offset against the benefit.
It really all boils down to whether it is worth arguing about the tax on interest on beneficial loans; generally, the cost will outweigh the tax.