The previous accounts of a limited company prepared by another accountant include an overdrawn Directors Loan Account (DLA) > £10000 which has not been repaid in more than 12 months; the accounts include the statement "interest will be paid on the loan at the official rate" - no such interest has been paid. I have at present added the interest amount as an additional asset against the relevant DLA as seems to be the intent of the previous accounts
My question is as far as HMRC are concerned are income tax and National Insurance still potentially due on the "unpaid interest"?
Thank you for your help
Philip Anstice
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Replies (13)
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Actually paid
HMRC are of the opinion that interest has to actually be paid to eliminate the benefit in kind. They do not consider a book entry to provide for the interest to be enough. I'm not aware of anyone successfully challenging that view, but someone else might be able to.
Of course, that only deals with the benefit in kind (which would have arisen whether the loan was repaid in 12 months or not). Is the s455 position in the clear?
Timing of payment
If the interest is not paid by 19 July following the end of the tax year then the benefit needs to be reported on P11D and Class 1A NI paid. If the interest is later paid, then the assessable benefit can be adjusted accordingly for tax purposes, but the 1A NI charge will stand.
A contractual obligation to pay is not the same as payment.
Company accounting year end
If the interest is not paid by 19 July following the end of the tax year then the benefit needs to be reported on P11D and Class 1A NI paid. If the interest is later paid, then the assessable benefit can be adjusted accordingly for tax purposes, but the 1A NI charge will stand.
A contractual obligation to pay is not the same as payment.
The query here is about the company's accounting year. So at company's year end a book entry is sufficient and credits coming in next accounting year on account of dividends, salaries etc will have taken care of the outstanding sum??
HMRC's illogical objection to a book entry being treated as payment can be resolved by a mutual exchange of payments by the two parties - easy in these days of online banking. Debtor pays interest, then 10 seconds later creditor makes a new loan of the same amount. Job done.
Why do HMRC force this absurdity on us?
Not absurd and not illogical
It is widely held that a credit to a DLA is a payment of that debt. It is absurd in the extreme to suggest that a debit to the DLA can also be treated as a payment, A debit does nothing but increase the indebtedness and in no ordinary or logical sense can it be seen as a payment of any debt.
But if you want to know the reason why HRC insist on this treatment it is because they are following not only what is common sense but more importantly what the Courts have handed down. The existence of an easy solution does not in itself create absurdity or illogicality. As for the suggestion of taking out a new loan 10 seconds later, that is simply inviting a challenge of artificiality.
Timing - again
Company year end is 31 March 2015. Throughout the year the director has an overdrawn loan account of £20k. The accountant books an interest charge of £650. That entry achieves nothing other than to show that the director now owes £20,650 to the company.
On 20 July 2015, the day after the P11Ds have been submitted (showing a chargeable benefit of, for argument's sake, £20k) the company declares a dividend of £10k which is credited to the DLA. First of all, there would need to be evidence that the credit was to be applied on a LIFO basis (FIFO being the default) and secondly that credit would not affect the Class 1A payable.
If the dividend were instead to be declared and credited on 18 July then both tax and NI charges could be avoided.
Surely not
If the dividend were instead to be declared and credited on 18 July then both tax and NI charges could be avoided.The benefit accrues over the period that they have had a loan in excess of £10,000 without paying interest. The amount actually owing at the due date for the P11Ds is irrelevant. This is benefit in kind we are talking about, not s455.
EDIT : I see from you subsequent post that you seem to be suggesting the dividend is effectively used to pay the interest due. Don't we still have the problem that the interest would be a book entry, not an actual payment?
In other words companies with 20 July or later accounting year-ends can always have book entry for the interest due??
Edit: I'm yet to have a look at the legislation surrounding the P11D reporting requirement on this item
I'm not sure that the ARD is at all relevant ...
... for the purposes of whether interest has been paid in time. The loan benefit is calculated on a 5 April basis and the deadline for payment of interest is 19 July. That's all there is to it - the company year-end is a dead herring.
Missed my point, Stepurhan
(A point that was not particularly well made). I was referring to a dividend declared on 18 July and used to pay the interest charge that had already been debited to the loan account. So if the interest is paid for the year in question, and is paid before 19 July, there is no reportable benefit.
Overdrawn DLA
In the good old days when we had District Inspectors and tax officers who actually reviewed accounts and tax returns, crediting a salary entitlement to a loan account was added back for the purposes of determining whether a loan account was actually cleared before the year end. The way round this was to pass a resolution at a directors meeting before the year end and pay the tax due. Otherwise HMRC substituted the date of the AGM as determining the pay date for PAYE and effective credit purposes. However, the credit was accepted as evidence of having cleared the loan account within nine months of the year end for distribution tax purposes.
So there's certainly nothing new in HMRC treating an interest charge to the DLA as being unpaid or not generating the appropriate tax relief.
The best advice to clients has to be - don't have an overdrawn loan account.