Hi everyone, I'm a bit of a finance newb, so please bear with me!!
Company A ltd, owned by Mr G wants to borrow some money of a family member's business, company B ltd, owned by Mr B.
The money will be used to fund growth and buy out of a service contract which is restricting company A's ability to grow. Company B has cash to spare, and Mr B owes Mr G a favor!
The logic is that by direct business to business lending, they don't have to add to Mr B of company B's tax liabilities from a business or personal level. For this reason they have opted not to go for a director's introduction.
Here are my questions:
- How would a loan from company A to company B be recorded from an accounting perspective?
- Will company A or B incur any tax liablity for doing this (EG company A paying corp tax on the loan being reported in it's account)
- Any suggestions for an agreement that could be drafted as evidence from an accounting perspective?
Hope this makes sense??
G_loco
Replies (9)
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1. As a debtor in A and a creditor in B, with related party transaction disclosures.
2. No. Loans are not income for tax purposes.
3. The transactions in the records will speak for themselves for accounting purposes, so no legal agreement is required unless the parties want one for other purposes, which they probably should to avoid any disagreement over when the loan is repayable.
Related party
Just picking up on the related party issues the new FRSSE effective January 2015 says:-
A person or a close member of that person’s family is related to a reporting entity if that person:
(i) has control or joint control over the reporting entity;
(ii) has significant influence over the reporting entity;
Now gut feeling suggests that there should be related party disclosure in the situation described by the OP however I’m having difficulty in applying the definition above to that situation to reach a conclusion as to what the disclosure should be.
I'm thinking along the lines that whilst Mr G & Mr B are close family members there is no transaction between Mr G & B Ltd nor Mr B & A Ltd. The transaction is between A Ltd & B Ltd.
Can someone enlighten me??
I think the "favour" you mention is sufficient to show significant influence and would disclose. There is no harm over disclosing anyway.
Understand that
I think the "favour" you mention is sufficient to show significant influence ... ,
Understand that however there is no transaction between Mr G & B Ltd nor Mr B & A Ltd (both of which would be disclosable). The transaction is between A Ltd & B Ltd.
But its by companies over which they both have control. I would disclose.
However you may disagree but I would disclose as there is never an issue with over disclosure. People always try to disclose the minimum instead of informing users. Why not disclose?
Not disagreeing with you.
Not disagreeing with you but at times to really understand the requirements in detail it's often best to consider actual, practical, examples as described by the OP.
Are we in agreement that whilst we can disclose it's not actually required by the FRSSE?
Control
Surely control depends on the figures.
If the size of the loan compared to the balance sheet of M G means the company would receive more in event of a winding up than Mr G then I would say that control would lie with Mr B and the related party issues kick in.
Or am I completely out of date?
you
I would say it depends on the size of the loan, it may be material for one company but not for the other.
I would also say that you could argue there is significant influence if a demand to repay in full or non-repayment would significantly affect the "going concern" basis of the lendor/borrower business.
Otherwise, I can't see any obligation to disclose other than providing transparency.
Presumably the loan will attract interest at a market rate? I also think it would be prudent to have an agreement, as much from the perspective of avoiding potential disputes later on, as to be able to demonstrate the commercial nature of the loan to any interested parties later on, bank, HMRC, potential investor etc.