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Interest on loans between companies

Interest on loans between companies

Hi, I do the accounts for the (very) small business I run, and have a query regarding loans.

Should one business make a small loan to another (say <3k) is there a requirement for interest to be charged on that loan?

If so what are the standard requirements/conditions for charging interest? For instance if the amount is repaid within a year could it be interest free? If not, what is the minimum time period over which interest has to be charged (e.g. monthly, quarterly?).

Are there any other important conditions to be aware of regarding loans between companies e.g. required paperwork etc?

Would greatly appreciate any advice. Not an accountant here but do have some experience doing basic accounts for small business.

Regards

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25th Jul 2014 11:04

No requirement

There is no requirement to charge interest on loans.  If you do, do not deduct income tax from the payment of interest to a company as would be required on a loan from an individual.

It would be prudent to have paperwork setting out the terms of the loan (repayment and any interest) signed on behalf of both companies.

 

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By TerryD
25th Jul 2014 11:09

RPT

And if these two companies are related parties, then don't forget the disclosure requirements in the accounts of each.

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By DMGbus
25th Jul 2014 13:45

"companies" terminolgy

The two answers above are accurate advice, UNLESS by "companies" you include one business that is NOT a limited company and one that IS a limited company.

Only yesterday I saw a new sole trader who described registering her "company" for self employment.   This is a common misunderstanding that by being in a business you have a "company" and then this leads others to think that it is a limited company.

So, if one of your companies IS a limited company and that "company" lends money to your other "company" and that other "company" is either a sole trader or as partnership then there are tax consequences to carefully consider.

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06th Aug 2014 09:32

Simplifying slightly, related parties are entities under common control.

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to pauljohnston
06th Aug 2014 09:47

Further clarification ....

johngroganjga wrote:
Simplifying slightly, related parties are entities under common control.

If the two companies/parties (one giving the loan, one receiving) share one or more directors, would that count as being 'under common control'?
I did a quick google search but there is a lot of material out there so thought it would be quicker to ask!
Once again I appreciate all your help.

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06th Aug 2014 09:55

So the two companies have different shareholders but some directors in common?

No need to trawl the internet. The definitions and disclosure requirements are in FRS8.

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to paulinleeds
06th Aug 2014 10:10

In this instance the director in common is also a shareholder in each. What would the implications of this be?

I'm afraid I'm not an accountant by trade so FRS8 does not mean a great deal to me (other than that it is an accounting standard I think?)

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06th Aug 2014 11:01

Are his shareholdings controlling or minority, or one of each?

Yes FRS8 is the relevant accounting standard. I know you are not an accountant, but as you are showing a lively interest in related party disclosures, reading it is your obvious next step, if you don't lose interest first!

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to Justin Bryant
06th Aug 2014 11:12

I believe he has an equal share in both (even split with one other individual).

I will have a look into FRS8 when I find a copy to read.

Thanks for the continued support and quick replies!

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By TerryD
06th Aug 2014 12:34

I've just got back from a weekend break and found that a client wanted a brief summary of the related party transactions under the FRSSE (which will apply to you as your companies appear to be small). So I thought I'd share my reply with you (hope the formatting comes out OK):

Related Party Transactions - FRSSE requirements

Definition

The disclosure requirements are the same as for FRS 8 except that the FRSSE (section 15) specifically requires that disclosure must be made of personal guarantees given by the directors in respect of borrowings by the reporting entity. There is, however, an important difference from FRS 8 is that, under the FRSSE, materiality is judged in respect of the transaction’s significance to the REPORTING ENTITY ONLY.

The definition of a related party is, however, different from that in FRS 8 (being based on the previous version of the standard):

Two or more parties are related when at any time during the period:

(a) one party has direct or indirect control of the other party; or
(b) the parties are subject to common control from the same source; or
(c) one party has significant influence over the financial and operating policies of the other party. Significant influence would occur if that other party is inhibited from pursuing its own separate interests.

For the avoidance of doubt, the following are related parties:

(a) parent undertakings, subsidiary and fellow subsidiary undertakings;
(b) associates and joint ventures;
(c) investors with significant influence and their close families; and
(d) directors of the reporting entity and of its parent undertakings and their close families.
Close members of the family of an individual are those family members, or members of the same household, who may be expected to influence, or be influenced by, that person in their dealings with the reporting entity.

It will be seen from this that companies owned by directors’ spouses or dependants are excluded from the FRSSE definition, unless that company is actually controlled by the director or there is significant influence. Moreover, key management personnel who are not directors (e.g. company secretaries) are not related parties.

Disclosure

Disclosure must be made of all material transactions with related parties, irrespective of whether a price is charged. The disclosure should include:

(a) the names of the related parties;
(b) a description of the relationship between the parties;
(c) a description of the transactions;
(d) the amounts involved;
(e) any other elements of the transactions necessary for an understanding of the financial statements;
(f) the amounts due to or from related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date; and
(g) amounts written off in the period in respect of debts due to or from related parties.

Controlling party

Where the reporting entity is controlled by another party, there shall be disclosure of the related party relationship and the name of that party and, if different, the name of the ultimate controlling party. There is no need to report the fact that there is no controlling party, where that is the case. Disclosure of more than one controlling party (e.g. “the members” or “the directors, who are also the major shareholders”) should be done only where is some binding agreement for them to act in concert.

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07th Aug 2014 00:09

From what I have read of the above, my understanding is that the two parties are therefore 'related'.

So my last question is what format does this Disclosure take?  Is this a form that has to be filled in or just a custom document stating all of the points a to g?  Don't suppose anyone has or knows of an example of one?

I assume it should be attached to accounts when submitted to HMRC?

Thanks again for all your help.

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07th Aug 2014 00:21

It's in a note to the accounts under the heading "related party transactions". It will appear in each company's full accounts, but need not appear in small company abbreviated accounts if either company is preparing them.

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to legerman
12th Aug 2014 22:09

abbreviated accounts are not required to disclose related party

johngroganjga wrote:
It's in a note to the accounts under the heading "related party transactions". It will appear in each company's full accounts, but need not appear in small company abbreviated accounts if either company is preparing them.

 

So small companies submitting abbreviated accounts need not disclose details of a related party transaction?

On a side note (out of curiosity) - would a loan from a director/shareholder to the company upon its creation to make initial stock purchases etc. qualify as a related party transaction?  I can't quite work out if the director/shareholder and the company are separate entities in this scenario?

You have all been fantastic in answering my questions - I  really appreciate all your help

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12th Aug 2014 22:32

They need to disclose them in the full accounts but not the abbreviated accounts, unless the transactions in question are loans to directors, in which case they go in the abbreviated accounts as well.

Yes the receipt of a loan from a director / shareholder would be a disclosable related party transaction.

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By TerryD
13th Aug 2014 09:25

Just to be clear

You don't have a choice of preparing either full accounts or abbreviated accounts. You must prepare full accounts, then, if you so wish, you can prepare abbreviated accounts for the sole purpose of filing at Companies House. The directors and shareholders are always separate entities from the company. The company is a separable legal entity in its on right - that's the whole point of its existence!

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13th Aug 2014 09:52

Just to add

Not only are the full accounts required by law to be distributed to the shareholders, but it is the full accounts which must be submitted with the company's tax return and computations to HMRC.

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13th Aug 2014 23:16

Thank you all!

I think that is all my questions answered.  Appreciate all of your help.  Keep up the good work!

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