BACKGROUND: Husband & wife ltd co, 50/50 shareholding, both directors.
If the company advances a loan of £10k to the Husband (which is repaid in full before 9 months after the year-end) then there is no BIK charge or s455 tax payable.
QUESTION 1: What if the same company advances another seperate loan to the wife of £10k (which will also be repaid in full before 9 months after the year-end)? The loan agreement is seperate but as she is related to her husband (also director) do the BIK rules consider that she / they have a loan in excess of £10k and chargable to BIK?
QUESTION 2: What if the loan agreements were made out in Joint names - i.e. "a loan of £20k to Mr & Mrs". Do they each still fall under the £10k BIK small loan threshold (presuming that they even fall within that thershold in Q1)?
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I'm not an accountant but can tell you on one of my cases we were pursuing the directors overdrawn DLAs and they tried to argue it was a "joint" DLA. My Solicitors argued there was no such thing and the accountants acting for the Directors were unable to defend it.
Not sure if that is helpful.
I'm sure if that is no longer the case, someone will be along to correct my shortly!
There are a lot of them. Joint accounts for directors I mean.
Was it the case that only one of the shareholders was a director?
That I can believe.
How can a genuine 2 director company not be permitted to have a joint loan account?
Even more likely if the directors are married
I'd love to know how much you are cheering on Wilson and booing Dragon at this stage.... :¬p
It depends whose directorship the loan is made by reason of.
If the activity of the company is one-sided (ie predominantly the activity of the husband or the wife), it would be easy enough to argue that the advances were made by reason of the one directorship.
I'm not sure it does depend. And I don't think HMRC (or anyone) would need to find a one-sided company to hang an easy argument from. I think the limit is £10,000 between them, not each.
I can see that being the case for a joint loan - as there would be joint and several liability - but I'd say two (genuinely!) separate loans made to a husband and a wife who are both directors would be considered separately for the £10k limit. I can't see anything in the legislation that would say otherwise (though I confess I haven't looked very hard!).
Edit: For the purposes of the BIK not s455
The conclusion follows fairly immediately from the definitions (and s174(1)(a)). His loan is a taxable cheap loan for her and vice versa; s185 apportions the benefit, not (doubles) the limit.
Here you go:
455Charge to tax in case of loan to participator
[F1(1)This section applies if a close company makes a loan or advances money to—
(a)a relevant person who is a participator in the company or an associate of such a participator,
(b)the trustees of a settlement one or more of the trustees or actual or potential beneficiaries of which is a participator in the company or an associate of such a participator, or
(c)a limited liability partnership or other partnership one or more of the partners in which is an individual who is—
(i)a participator in the company, or
(ii)an associate of an individual who is such a participator.]
My reading of this is that Tax Dragon is correct. Interesting & useful question though as I suspect there may be married, or otherwise associated, directors exceeding the limit.
Isn't that just the S455 charge though? How are you arguing that applies to the BIK charge?
But that is the s455 rules, which are not in point in this case as the loans are paid within 9 months. Associated people are included in those rules because otherwise you could avoid the loan charge entirely by making a loan to a non-participator spouse. Also you never reach the associate point in this case anyway, since both individuals are participators.
I don't see that proves that the £10k benefit in kind limit is for them both collectively, since that is a separate piece of legislation. To do that you would need an associated provision within the benefit in kind legislation that has precedence over the rule that benefit in kind for an individual starts at £10k. Is there such a provision?
But it's not 100% clear when you find it! :-)
(Not to me, anyway. It doesn't deal with cathygrimmer's point.)
It seems pretty clear to me:
This means that for the purpose of the exemptions for small loans (see EIM26140) and small non- qualifying loans (see EIM26145), the full amount of the joint and several loan must be considered for each employee
If it's not a joint and several loan, each loan should be considered separately and if each person is a director/employee each will be entitled to the £10k exemption. That would obviously not apply if one spouse is neither employee nor director.
I'm not sure how you can say that EIM26280 is consistent with your view (it is neither consistent nor inconsistent since it is irrelevant. EIM26280 discusses the treatment of joint and several loans, your view is about the treatment of separate loans.
I misread (past tense) you. I thought you were citing EIM26280 as answering the question. Had I known that you realised it was irrelevant, I would have responded differently. Possibly thus:
It seems pretty clear to me:
This means that for the purpose of the exemptions for small loans (see EIM26140) and small non- qualifying loans (see EIM26145), the full amount of the joint and several loan must be considered for each employee
If it's not a joint and several loan, each loan should be considered separately and if each person is a director/employee each will be entitled to the £10k exemption. That would obviously not apply if one spouse is neither employee nor director.
We are agreed (as confirmed in EIM26280) for joint and several loans. Of course, EIM26280 does not mention loans that are not joint and several and I do not agree with your closing (citation-free) paragraph, as already explained.
Thanks for a lively discussion and thanks WP. Link for convenience: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim26280
I understand then; that by default a loan advanced in joint names of say £20k is assessed for BIK purposes as £20k EACH!
If however there is one advance of £10k to husband and another of £10k to wife (with separate written agreements) I'm inferring that they may each enjoy their BIK £10k small loan allowance. Any trip wires to this?
If however there is one advance of £10k to husband and another of £10k to wife (with separate written agreements) I'm inferring that they may each enjoy their BIK £10k small loan allowance.
I would definitely run with this if the paperwork backs up separate loans.
You'd have to rely on s174(5)(b) to avoid a tax charge if you did so.
That might be a hard sell. See further EIM26150.
I think on a strict reading you could be right - and the 'no benefit' provision of Section 174(5)(b) would need to be relied on. Though that might not be such a hard sell - depends on what the loan is being used for. I can think of many circumstances where one spouse would derive no benefit from a loan to the other spouse.
It would be interesting to know if HMRC take that point. They don't flag it in their checklist or mention it in the guidance or suggest that Section 185 applies to anything other than joint loans. And it does seem inequitable that, as separate 'employees' with entirely separate loans related to their separate directorships, the £10k limit doesn't apply individually (though I'm well aware that tax law isn't always equitable!).
On the other hand, it would seem equally ridiculous to tax a couple that took a joint loan more harshly than one that took individual loans for the same purpose (though I'm aware that that is where tax planning would come in if such was indeed the case!)
Btw... what does "strict" mean?
A joint loan is a loan of the full sum to both borrowers with joint and several liability - so I see a difference there.
I'm sure a dictionary can resolve your confusion!
No. Having re-read the legislation, I agree with TD, the wife's loan is an employment-related loan in relation to the husband (as is the husband's and any joint loan), and the husband's loan is an employment-related loan in relation to the wife (as is the wife's loan and any joint loan), by virtue of s 174(1)(a)and 174(6)(a).
Thus all of the loans are employment-related loans in relation to both of them.
Thus there is only one £10,000 limit for all such loans, by virtue of s 180(2).
Lastly you apportion the benefit, if the loans are provided by reason of the two employments (as opposed to just one), under s 185.
Whilst EIM26280 may not be hard to find, it's also not very hard to imagine it being complete horse-5h1t, meaning that the proper starting place is the legislation itself, rather than HMRC (mis)guidance.
I imagine it depends on whether or not one considers beneficial loans to be within the benefits code. And whether, in the client's best interests, you would choose to ignore HMRC guidance that appears to be in the client's favour. I am of course referring to the wording at EIM20505, and the question of whether beneficial loans fall to be included in the "any benefits" referred to therein.
I read EIM20505 yesterday and was frustrated by the withhold under the exemption.
I'd be interested as to your logic on how it changes (or might affect) the conclusion discussed above.
My reading:
A joint and several loan has a single £10k limit - I don't think there is any dispute over that.
For separate loans, and assuming both are directors/employees:
EIM20505 says that the benefit is assessed on the member to whom the benefit is provided. In absence of anything that says that 'benefit' does not include beneficial loans (I concede that we don't know that the withheld text says) I conclude that husband and wife are assessed separately on their respective loans (and each entitled to £10k exemption).
If we take the husband's loan - is it an employment loan? Yes, because it has been made to an employee or a relative. Same with wife. s174 simply determines whether a loan is an employment-related loan or not, it does not establish who is to be taxed on it. If the spouse is a non-employee both will be taxed on the employee - I don't think there is disagreement there.
Having established that both loans are employment-related, I would rely on EIM20505 and assess them separately, with a £10k exemption for each. Otherwise, taking it to the illogical conclusion, H would be assessed on both his and W's loans, with a £10k exemption, and W assessed on both her and H's loans, with a £10k exemption. I don't see anything in the legislation or HMRC guidance that permits such double assessment. (Perhaps s185 does, by virtue of the "etc" in the title but I read s185 as applying to a single loan - as it does use the singular.)
Though, to argue Dragon's point (as I've accepted that it is 'strictly' correct!), Section 185 doesn't necessarily apply to only joint loans so would prevent a double tax charge on a non-joint loan assessable on two employees and it's application to a single loan makes no difference as it is only dealing with the apportionment of the tax liability of each loan once liability has been established, albeit that there may be more than one loan to be considered for the £10k limit.
Re EIM20505, is 'charging' the benefit the same as 'take into account for the £10k exemption'? I don't know the answer - maybe it's in the withheld bit!
Thank you for the full explanation. We agree on a lot ("a lot" is now a government-approved expression, at least adjectivally).
I would replace "illogical" with "inevitable" in your closing paragraph though, because that's exactly the place that the legislation takes you to. Indeed, a latent double-charge lurks behind all of the 'relative' provisions throughout the benefits code (EIM20502 helps with what HMRC mean by that). Which is why there are provisions (such as s169, s204 and, for us, s185) specifically to remove the double charge. EIM20505 tells HMRC officers who to tax in such cases. What s185 does not do is double up on the £10,000. (Nor, for that matter, does EIM20505.)*
* Edit: as Cathy points out, at least not in the bit not withheld!
I agree - s185 does not double up the £10k, apportioning only the chargeable benefit after taking account of all exemptions etc.
By the same token, though, and at risk of repeating myself, s174 does not say that in the case of two loans each spouse is (potentially) assessable on both. It merely asks whether the loan is an employment-related loan.
I stand by my interpretation of the legislation and guidance. Bearing in mind that I too am often dismissive of HMRC's guidance, nevertheless the fact that HMRC need to specifically outline the(ir) treatment of joint and several loans would suggest (and it is only a suggestion) that the aggregation is not required where benefits are provided to employees separately, even where they are related.
I concede that there is an argument the other way but nothing has yet persuaded me to change my mind.
By the same token, though, and at risk of repeating myself, s174 does not say that in the case of two loans each spouse is (potentially) assessable on both. It merely asks whether the loan is an employment-related loan.
We will agree, I'm sure, that this is the nub. (I like a good Aweb nub.) Both loans are employment-related. We will further agree that (as The Dullard put it):
the wife's loan is an employment-related loan in relation to the husband (as is the husband's and any joint loan), and the husband's loan is an employment-related loan in relation to the wife (as is the wife's loan and any joint loan), by virtue of s 174(1)(a)and 174(6)(a).
So what? Good question. (Oh, but before we look as s175 to find out, the exclusion in s174(5)(b) mentioned above should not be forgotten. If say W's loan does not benefit H, then all bets are off - the £10,000 can double up. One point that this subsection makes plain, if it wasn't already, is that in s174 we are considering the employee (and what is employment-related vis-à-vis the employee), not the status of the loan per se. This is supportive of the way The Dullard expressed it.)
Right, to s175. Subsection 1. There's the employee again. And his/her employment. And the loans related to that employment. I note s175(4). Oh, and s175(5), which brings in the threshold. For the employee. I'm not minded to read on unless you can say why I need to.
Let me make my point about s185 a different way. It doesn't stop W's loan being employment-related vis-à-vis the H, nor H's loan for the W. What can do that is s174(5)(b).
Clearly there has to be a reference to an employee for there to be an employment-related loan.
We are at odds on our reading of s174, though, and I do not agree with Dullard's view either.
Again to repeat myself, and starting at the top, and considering s174 from the standpoint of the employee:
Is the loan to H a loan to an employee or a relative? Yes, it is a loan to an employee so it is an employment-related loan.
Let's look at W now. Is the loan to an employee or a relative? Yes, it is a loan to an employee so it is an employment-related loan. I'm not minded to read on in respect of the wife unless you can say why I need to.
There is a subtle difference therefore in our approach to s174. You appear to be considering the employee's position and considering all loans made to that person and/or his/her relatives. However, s174 - as I think I've said before - sets out to define what an employment-related loan is. It does not seek to establish whether a particular person has employment-related loans. To some, there may be no difference but I do see (make) a distinction.
Consider the case where directors H and W are each provided with a car. Following Dullard's argument, and the wording of s114(1)(a), we would be in the position of determining that both H and W have the benefit of both cars, with the need to then rely on apportionment. In my many years of dealing with such companies it has never entered my mind that I would need to take such an approach, although Dullard may take the view that strictly that is the case. It may not be truly analogous but I liken the joint loan treatment to that of a BMW 5-series provided to H & W and the individual loans being H's BMW and W's Audi.
The car is different, because there is a by reason of the employment test in Chapter 6 (it's in s 114(1) and s 117). Where there is a by reason of the employment test, we get to ask "by reason of who's employment?"
Contrary to what I initially thought, there is no by reason of the employment test in Chapter 7, meaning we don't get to ask that question. We just have to ask, by reference to each employee "what employment-related loans are there?" It's a definition with loans by the employer to the employee's spouse falling squarely within the definition, and no by reason of who's employment test.
There's a by reason of employment test in every other chapter of Part 3, other than Chapter 7, and therein lies the rub.
Actually, the car isn't any different. s 117 says that a car is made available by reason of the employment if it is made available by the employer to the employee or a member of the employee's family (so wife's car is husband's benefit, which is then confirmed in the apportionment provision in s 148(4)).
Historically it dealt with the position where one spouse was the real director and the other spouse was just an "assistant" but got their own swanky car.
Not a distinction I had made. (Tbh I thought post Apollo Fuels the rub ran throughout the benefits code - new s117 for cars, etc. Maybe I've failed to grasp something.)
(Edit: oh, I've seen your edit. We are indeed on the same page.)
I don't see that the "by reason of employment" is of any help in this analysis - see s117(1).
No, it's cars that aren't any help in this analysis, as per my edit. You are still relying on the apportionment provision. They aren't a useful comparitor.
With motorcyles though, for example, chargeable under Chapter 10, s 201(2) forces an analysis of who's employment the benefit is provided by reason of, and it is that which prevents the wife's motorcycle being taxed on the husband and vice-versa.
I don't see how you can say that the "by reason of employment test" isn't any help to the analysis when you're the very person that's seeking to apply that test to prevent the wife's loan being treated as the husband (because it's made by reason of her employment, and not the husband's), and vice versa.
Cars. I've definitely already mentioned s169. I've definitely already said this principle that H's benefits are employment-related for employed W (irrespective of whether H is employed... where are you seeing that [as a] distinction in the legislation?) is pervasive throughout the benefits code. Each time a double charge might exist as a result, there's a provision - s169, s108, s185, s204 - to prevent it.
By the same token, though, and at risk of repeating myself, s174 does not say that in the case of two loans each spouse is (potentially) assessable on both. It merely asks whether the loan is an employment-related loan.
Sorry, I think I misread you (again... even though you repeated yourself... and even though I quoted you back!)
Anyway, I disagree. It says precisely that in the case of two loans each spouse is (potentially) assessable on both (or, even more precisely, what The Dullard said it says).
You are (I suggest) blinkered, even hoodwinked, by what you think the conclusion of that would be - which you think is illogical. Instead, the legislation requires that conclusion and then provides relief when double taxation would otherwise arise.
I think I've read you correctly now. Apologies for being dense (here and in some of our other discussions).
No. Having re-read the legislation, I agree with TD, the wife's loan is an employment-related loan in relation to the husband (as is the husband's and any joint loan), and the husband's loan is an employment-related loan in relation to the wife (as is the wife's loan and any joint loan), by virtue of s 174(1)(a)and 174(6)(a).
Thus all of the loans are employment-related loans in relation to both of them.
So if I understand correctly, and discounting any suggestion of joint-loans, you're saying there are 4 *separate loans of £10k apiece; 2 for the husband (his own £10k loan and a £10k employment-related loan for his wife's loan); and by the same token 2 separate loans of £10k apiece for the wife.
* "separate" because HMRC prohibits the aggregation of such loans, even where a single director has two or more loan accounts. You guys know that already, but for anyone else following this thread there's as good an interpretation as any at https://assets.publishing.service.gov.uk/government/uploads/system/uploa... Section 9 "Have all loans been considered separately where appropriate?"
Moving on, we've been considering 2 x o/drawn DLAs of £10k apiece; but the problem for me with your application of employment-related loans to the spouse would lead to some unnatural results if say the husband's DLA was £20k o/drawn and the wife's DLA was at £0 (because each would be taxed on the husband's £20k o/d DLA).
To exercise that point, Husband's DLA at £20k o/d and wife's DLA at £20k in the black would (given that separate DLAs cannot be aggregated) effectively confer a £20k o/d account not only upon the husband but also upon the wife.
The Dullard wrote:
No. Having re-read the legislation, I agree with TD, the wife's loan is an employment-related loan in relation to the husband (as is the husband's and any joint loan), and the husband's loan is an employment-related loan in relation to the wife (as is the wife's loan and any joint loan), by virtue of s 174(1)(a)and 174(6)(a).
Thus all of the loans are employment-related loans in relation to both of them.
So if I understand correctly, and discounting any suggestion of joint-loans, you're saying there are 4 *separate loans of £10k apiece; 2 for the husband (his own £10k loan and a £10k employment-related loan for his wife's loan); and by the same token 2 separate loans of £10k apiece for the wife.
* "separate" because HMRC prohibits the aggregation of such loans, even where a single director has two or more loan accounts. You guys know that already, but for anyone else following this thread there's as good an interpretation as any at https://assets.publishing.service.gov.uk/government/uploads/system/uploa... Section 9 "Have all loans been considered separately where appropriate?"
Moving on, we've been considering 2 x o/drawn DLAs of £10k apiece; but the problem for me with your application of employment-related loans to the spouse would lead to some unnatural results if say the husband's DLA was £20k o/drawn and the wife's DLA was at £0 (because each would be taxed on the husband's £20k o/d DLA).
To exercise that point, Husband's DLA at £20k o/d and wife's DLA at £20k in the black would (given that separate DLAs cannot be aggregated) effectively confer a £20k o/d account not only upon the husband but also upon the wife.
s185 deals with your final paragraph (if one accepts that "etc" covers such loans).
"etc" is in the title of s 185, which isn't very relevant. "etc" isn't mentioned in s 185 itself, which is where the actual law is. I refer you, in particular, to IA 1978, s 1.
For the benefit of the hard of understanding:
H and W each have a loan of £10K
Taking s 63 and s 66 together we need to work through the "benefits code" and establish the [total] employment income of an employee (which includes an office-holder, s 5).
Eventually, for both H and W (separately) to determine their employment income (as separate employees), we arrive at Chapter 7. Let's start with the husband.
s 173: this Chapter applies to an employment-related loan... What's an employment-related loan s 173?
s 174: an employment-related loan includes, amongst other things:
- a loan made by your employer (A) to you (s 174(1)(a)), and
- a loan made by your employer (A) to your wife (s 174(1)(a).
So H has two employment-related loans, each of £10,000.
Any chance we can disregard any employment-related loans, s 174?
s 180(1): yes, effectively, in relation to an employee and a tax year, you don't have to calculate a benefit on your employment-related loans if the normal £10,000 threshold is not exceeded.
But when is the normal £10,000 threshold not exceeded, s 180(1)?
s 180(2): the normal £10,000 is not exceeded if, at all times in the [tax] year, the aggregate of amounts outstanding on all of your employment-related loans does not exceed £10,000.
But I have a £10,000 loan which is an employment-related loan and my wife has a £10,000 loan which is an employment-related loan.
s 180(2): well that means that the aggregate of your employment-related loans is £20,000.
s 180(1): and the normal £10,000 threshold is, therefore, exceeded, meaning you have to calculate the benefit.
But that means my wife is going to have to do the same thing, and is going to have to include the same amount of benefit in her employment income, so we're going to be taxed twice on the same loan.
s 185: no, I can help you there. Where in any tax year, the cash equivalent of the benefit of the same taxable cheap loan is to be treated as earnings of two or more employees (such as you and your wife), the cash equivalent can be apportioned between you on a just and reasonable basis.
But, s 185, if we each had our own £10,000 threshold, we wouldn't be taxed on anything.
s 180(1): you do each have your own £10,000 threshold, but you've both exceeded it, as you both have aggregate employment-related loans of £20,000. I've told you, and s 185 has tried to help you, but you're just not listening.
But that doesn't make any sense.
s 173, s 174, s 180(1), s 180(2), s 185: So? It's the law.
But it's not fair.
s 173, s 174, s 180(1), s 180(2), s 185: If the law applies equally to everybody, it's perfectly fair.
Shakespeare couldn't have written better.
(I might nick this scene for my Lien of Duty [see what I did there?] spin-off.)
But that means my wife is going to have to do the same thing, and is going to have to include the same amount of benefit in her employment income, so we're going to be taxed twice on the same loan.
s 185: no, I can help you there. Where in any tax year, the cash equivalent of the benefit of the same taxable cheap loan is to be treated as earnings of two or more employees (such as you and your wife), the cash equivalent can be apportioned between you on a just and reasonable basis.
Ahha.. ...apportioned on a just and reasonable basis. Thank you, D, for taking the trouble to explain to those of us in the wake why this doesn't lead to distorted results for (say)£15k o/d He / £5k o/d She or, flexing it, £20k o/d He / £0 null DLA position She situations.
Thank you for letting us join in an adult conversation. You're very tolerant. And please discount audience participation when you're tallying you're 50 posts count :)
But that means my wife is going to have to do the same thing, and is going to have to include the same amount of benefit in her employment income, so we're going to be taxed twice on the same loan.
s 185: no, I can help you there. Where in any tax year, the cash equivalent of the benefit of the same taxable cheap loan is to be treated as earnings of two or more employees (such as you and your wife), the cash equivalent can be apportioned between you on a just and reasonable basis.
Ahha.. ...apportioned on a just and reasonable basis. Thank you, D, for taking the trouble to explain to those of us in the wake why this doesn't lead to distorted results for (say)£15k o/d He / £5k o/d She or, flexing it, £20k o/d He / £0 null DLA position She situations.
Thank you for letting us join in an adult conversation. You're very tolerant. And please discount audience participation when you're tallying you're 50 posts count :)
Sorry I haven’t read every post but if an employee is already an employee then I don’t see why they would also be counted as a relative of an employee.
So you read s174(1)(a) “made to an employee” and don’t need to read “or a relative of an employee”. The loan to each spouse is made to a person who is an employee (and not a relative of an employee).
So you ...don’t need to read “or a relative of an employee”.
That's Wilson's argument, summarised.
Save some reading and look at The Dullard's playlet to see why we think otherwise.
What, you mean we should just make 5h1t up that simply isn't there? Surely it would just be easier to ignore the facts in the first place and just do whatever the fuch we like?
