A one person company / director lends £35,000 interest free to his sole trader business. This is for help with working capital and buying assets for the business.
The loan is still outstanding at the financial year end, is this a possible S455 loan to a participator and a benefit in kind charge payable by the Director or are the rules different as it's for trade purposes and not for personal purposes.
What if any are the possible tax consequences of this arrangement.
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The company has lent money to a director. Assuming a complete lack of evidence to the contrary, what the director has used the funds for is beyond the control of the company (as a legal entity). I assume therefore that the usual provisions re loans to directors apply.
The company has lent £35,000 to a participator (I assume that the one man is a shareholder), so unless the company is in the business of making loans, a charge arises under s.455 as it does not fall within the circumstances for exception listed in s.456 CTA 2010.
The beneficial loan BIK does not apply where, if interest were paid on the loan (whether or not it actually is), it would qualify for relief against the profits of a trade conducted by the borrower (director) - see s.178 ITEPA 2003.
The section 455 can be avoided by way of a bonus, dividend declared or paid within 9 months.
It's the BIK part I'm struggling with. So should the director enter this interest at 3% on a P11D at the official rate and the sole trader company claim a deduction against profits even if no interest was paid to the company.
OK - so why not pay it ?
Director's bik reduced to zero, clear payment of interest by his business.
Everyone's a winner.
No no no. First step - determine whether he could have claimed a trade deduction for interest paid on the same loan from, say, his bank. If the answer is yes, you need do nothing.
If the answer is no, then that's the point at which you need to consider charging interest (directly or via DLA) to avoid the BIK.
It's the BIK part I'm struggling with. So should the director enter this interest at 3% on a P11D at the official rate and the sole trader company claim a deduction against profits even if no interest was paid to the company.
No - re-read the last paragraph of my earlier response at 11:29 and s.178 ITEPA:
The beneficial loan BIK does not apply where, if interest were paid on the loan (whether or not it actually is), it would qualify for relief against the profits of a trade conducted by the borrower (director) - see s.178 ITEPA 2003.
Not necessarily.
Would interest on the loan, IF it had been paid, been deductible in computing the trade profits? If the answer is yes, then the loan should be exempt from the BIK provisions - as already clearly explained to you more than once -see in particular Euan's posts. I'm not sure how much more plain we can make it. If you're still not getting it, I suggest an alternative career path.