Interest charged on DLA

Interest charged on DLA

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A client has an overdrawn DLA which was (say) £10k overdrawn at the 1st and last day of the year.
To avoid a P11d BIK charge the company plans to charge the director interest at the official rate. The company would then declare the interest in its accounts and pay tax on it accordingly
As the director would not therefore have benefitted from a low interest loan I imagine that there would be no P11d benefit.
However I have read on the internet that even if the company charges interest at the official rate the director will still be treated as having received a beneficial loan because there is no agreement in place.
My queries are:
1. Is this indeed the case? As the company year end is May 2007 and the accounts are only now being drawn up, if a P11d is due it is now some 6 months late.
2. If minuted board meeting agrees that henceforth all loans made by the company to directors shall have interest charged at the official rate will this enable us to avoid a P11d beneficial loan in the future.
3. If not what will?
Many thanks for your attention
Martin

martin curtis

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By User deleted
22nd Nov 2007 17:26

Where on the internet did you read this....
....because booklet 480 states that any potential BIK is reduced by the amount of interest paid by the director.

If the official rate is applied and charged to the director, even through his DLA, BIK is reduced to nil - so I would agree with your initial thoughts.

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By AnonymousUser
22nd Nov 2007 18:01

My source was 'Business Zone'
I wasn't sure whether I should admit to looking at other accountants forums but earlier I googled 'beneficial loan interest' and came up with this link to 'business zone'. Not heard of it before but as the correspondents included Nichola Ross Martin I thought I'd better take it seriously
https://www.businesszone.co.uk/cgi-bin/item.cgi?id=161079

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By User deleted
22nd Nov 2007 18:30

There are two different tax issues
One is in respect of beneficial loan interest, which providing the director pays interest at least the official rate, will reduce any personal benefits in kind or liability on that front accordingly, and the other issue is the charge under s.419 ICTA 1988, which is a tax charge paid by the company. This charge is repaid by HMRC after the accounting period end in which the director repays the loan.

Business zone is a sister site so we don't mind you surfing there! This why the same forum queries come up, the link on Accountingweb is this one:
https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=161079

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By Paula Sparrow
23rd Nov 2007 13:56

The Revenue see it differently
EIM26257 of the Employment Income Manual advises Inspectors they should only allow interest "paid" on a loan if there was an obligation to pay the interest. Therefore, an informal agreement between a director and his company does not appear to satisfy their criteria for avoiding a benefit in kind charge on a loan.

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