Interest on loans between companies

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.

RPT

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

"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.

Simplifying slightly, related parties are entities under common control.

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.

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!

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.

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.

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.

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!

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.