P11D and overdrawn DLA

P11D and overdrawn DLA

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I've trawled through previous threads and found conflicting views on both of my queries:

1. Is a P11D entry required when the director has been charged interest on his overdrawn DLA at official HMRC rates so that there is no benefit?

2. Is it OK to add the interest to the DLA or does he have to be shown to pay it with a transfer of funds?

Thanks for any help with this.

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By User deleted
29th Jun 2012 16:23

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1    No

2    Divided opinion on this. HMRC don't seem to challenge the addition of interest to DLA, but strictly speaking this is not correct. Interest charged to a DLA is a debit entry, ie increasing the amount due by the director to the company. In no sense can he therefore be said to have paid the interest - it has simply been accrued, to be paid at a later date. Payment of any element of a DLA, including any interest therein, requires a credit entry against the DLA. The fact that the company is taxed as the interest receivable hits the P&L is not, as some would argue, an indicator that interest has been paid - it is merely a consequence of the fact that loan relationship credits are usually taxed on the basis of the accounting entries. Again, the credit represents nothing more than accrued interest due to be paid to the company at some point.

There is clear supporting case law on this point, where it has been held that interest rolled-up into a bank account balance has not been paid.

Having said all that, I have - as noted above - yet to see HMRC take the point.

Remember also that there should be a binding obligation to pay the interest (it doesn't help when the accounts disclose the loan as being interest-free, even though interest is charged through the accounts!). Again, I have yet to see HMRC ask for evidence of such an obligation.

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By carnmores
29th Jun 2012 16:49

point taken

i note how this varies from say tax on wages credited to the loan account, ie tax is due when first available.

 

also if there is subsequent repyament of loan the it might be better to state that interest is repaid before capital? 

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