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Charging DLA interest to the DLA

Is it acceptable to charge the interest due on a DLA to the DLA and then clear the bal with a divi?

I recall this has been discussed onn here before but just wondered if there had been a definitive verdict?

If the average balance on a DLA in the year was say 20,000 then interest due on this would be 600 (at 3%). Can 600 be credited to the P&L and debited to the DLA.

Then declare a dividend for 20,600 to clear the DLA balance? Does this get round the benefit in kind issue?

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18th Dec 2017 12:14

Thanks.

Yes I had read the EIM's and some of the threads previously run on the subject and the sheer length of the threads indicated a level of disagreement about the interpretation of the position.

I wondered if there was now any form of consensus on the simple scenario I outlined in my question?

Interest due on the overdrawn DLA is credited to P&L and debited to DLA. Company is taxed on the interest.

A dividend is declared which clears the DLA including the interest charged which means the interest has effectively now been paid.

Director pays tax on the dividend.

Are the EIM's and case law saying NO to this method of accounting?

Just wanted to know if there was general agreement that this either was or was not acceptable

Thanks (1)
By Ruddles
to soundadvice
18th Dec 2017 13:02

From recollection, the disagreement tended to revolve around whether the debiting of interest to the DLA was in itself sufficient to avoid the BIK. Because there were some muppets out there that would argue that the debiting of something to the DLA amounted to payment of that something by the director.

You also need to watch the timing of the discharge of the debt - if you're too late you might be able to dodge the tax charge but not necessarily the NI charge.

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18th Dec 2017 12:56

The point about this is not that there is any lack of clarity about what the law says, but that the law is an [***] for saying it, and HMRC are even worse [***] for seeking to apply strict law in this area.

The law is an [***] because there is a simple way to turn capitalised interest into paid interest. That is by taking a new loan from the company and then paying it straight back to the company to discharge the interest. The fact that taxpayers who jump through those hoops obtain a tax advantage over those who achieve the same end result more efficiently and elegantly is of course absurd.

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to Portia Nina Levin
18th Dec 2017 13:48

Meaning, presumably, that, if the end result was indeed the same, as John said, then there would have been no payment in either case.

That's not conclusive though, is it? You'd get the same end result by reversing the order (pay the interest first and then draw money out again); in that case, I assume, we'd all be happy that the interest had been paid.

So John's comment about the law resembling a mule is not unreasonable.

But the law is the law.

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to Tax Dragon
18th Dec 2017 14:05

John's not talking about taking the money out and paying it back in again though. He's suggesting a book entry whereby the interest isn't added straight to the DCA, but money is borrowed from the company on another loan balance.

So,
Dr New loan
Cr DCA

According to John, you have a payment of interest.

I don't know why we need to have this pointless discussion over and over.

People can do whatever they want, and then argue the toss, and call people donkeys as much as they like, but it seems to me simpler to comply with HMRC's view, cince it isn't hard.

It takes just a few steps:
1) record the fact that the director is obliged to pay interest at the official rate.
2) record the fact that it is the company's policy to add interest to the DCA on 5 April each year for the tax year then ending.
3) record the fact that it is agreed between the company and the director that any credits to the DCA are to be applied first in satisfaction of any interest that has been added to the account, in priority to the capital, overriding the rule in Clayton's case.
4) just make sure you get a credit to the DCA that is at least equal to the interest debit.

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to Portia Nina Levin
18th Dec 2017 14:11

Just to be clear - I never said any such thing. Read my post.

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to johngroganjga
18th Dec 2017 15:18

To be fair, it's not hard to come up with many other examples where two people in the same financial position, and with the same income and outgoings, could have wildly different tax liabilities.

If that was not so, why would we need tax advisors?

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18th Dec 2017 13:00

For the benefit of the hard of understanding:
- Despite the assertions of johngrowsganja, interest is not paid until it is, as a matter of fact, paid.
- Adding the interest to the DCA balance does not make it paid. That's what EIM26251 says, which you claim to have read.
- Crediting a dividend to the DCA will constitute payment, to the extent that it gets matched with the interest, applying the rule in Clayton's case, if necessary (see EIM26261.
- However, HMRC might still argue that the amount does not constitute interest, such that interest has not been paid, if the individual is not under an obligation to pay interest. That's what EIM26250, EIM26255 and EIM26257 say, which you claim to have read.

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to Portia Nina Levin
18th Dec 2017 16:44

Portia Nina Levin wrote:

For the benefit of the hard of understanding:
- Despite the assertions of johngrowsganja, interest is not paid until it is, as a matter of fact, paid.


Except, as he has already pointed out, he didn't say any such thing.

What he said was, if someone can eliminate a BIK by putting the interest amount in and immediately taking it out again, (leaving them in exactly the same position as someone who has simply credited the interest) then the law allowing that is poorly written.

If you weren't so busy making "witty" insults and actually read what he'd posted, you'd actually realise that.

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to stepurhan
18th Dec 2017 16:54

For the benefit of the hard of figuring things out for themselves, I'd actually written that before I'd seen John's post of 12:56. I was referring to comments he had made in the previous lengthy debate.

Hence my subsequent post at 13:01 directly to his facile point, which appears in the thread before my post of 13:00 (which was typed while John made his post) due to the foibles of accountingweb.

Still, at least you've managed to make a worthwhile contribution to the thread.

Did I say worthwhile? I meant worthless.. Silly me.

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18th Dec 2017 15:41

Reading things not written in plain English and understanding them are 2 different things.

Having read previous posts and threads and the HMRC guidance on this I remained confused about what was and was not acceptable in practice; hence I posted a simple example requesting clarification from greater and more experienced minds than mine

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to soundadvice
18th Dec 2017 15:47

Thus regenerating the same pointless debate.

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18th Dec 2017 16:24

Proving that tax and accountancy truly are 50 Shades of Grey (or Gray) but in real life and far sexier than the fictional version.

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