P11D Beneficial Loans

Interest on beneficial loans over £10k

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When a director has an overdrawn loan account of over £10,000 to avoid a BIK arising and the loan needing to be disclosed on a P11D, can the interest merely be added to the loan or does the director have to physically pay the company the interest element to avoid a P11D BIK arising?

Replies (18)

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By FactChecker
06th Jun 2024 17:54

"can the interest merely be added to the loan .. to avoid a P11D BIK arising?"

What source have you found to indicate that's ever an option?

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By Paul Crowley
06th Jun 2024 18:24

Just a director or is he a participator.

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By Mr_awol
06th Jun 2024 18:38

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim26251 may be relevant (or not)

Then again that statement can apply to a great many pages of the manual(s)

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By Ruddles
06th Jun 2024 18:46

There are some here, who appear not to understand the difference between debits and credits, that would argue that adding the interest to the debt amounts to payment of the interest.

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Replying to Ruddles:
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By More unearned luck
06th Jun 2024 20:46

That is what my bank does. The bank debts interest paid in its P&L with £1.59 and credits my account with £1.59 and I have that amount of taxable income. I don't think that I can escape tax by averring to HMRC that the bank has merely added interest to the sum it owes me or that HMRC would deny the bank tax relief on the £1.59 on the same ground.

But there is a contract between the bank and me that was was made when I first lent the bank some money.

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Replying to More unearned luck:
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By More unearned luck
06th Jun 2024 20:50

Perhaps more pertinently, overdraft interest is also merely a book entry but that does stop the credit to the P&L a/c being part of the bank's taxable profit, even if the customer can't get tax relief on the sum the customer has 'paid'.

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Replying to More unearned luck:
By Ruddles
06th Jun 2024 22:26

What you are describing is the opposite - in the case of the DLA the interest is being debited, not credited, to the loan account. The corresponding credit to the P&L is taxable, even if not paid, because that is what the loan relationship code says (which is also why the bank gets relief in your example). It doesn't have to be received to be taxable, but it does have to be paid to avoid the BIK.

It is also worth noting that when the bank credits your account with interest that is at your disposal (subject to withdrawal restrictions depending on account type) just as a credit to a DLA is treated as payment. In other words, it is important to understand that the treatment of debits is different to treatment of credits.

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Replying to More unearned luck:
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By Mr_awol
07th Jun 2024 07:37

More unearned luck wrote:

That is what my bank does. The bank debts interest paid in its P&L with £1.59 and credits my account with £1.59 and I have that amount of taxable income. I don't think that I can escape tax by averring to HMRC that the bank has merely added interest to the sum it owes me or that HMRC would deny the bank tax relief on the £1.59 on the same ground.

But there is a contract between the bank and me that was was made when I first lent the bank some money.

If you read the page I posted it covers this treatment in some detail.

Not that I’m a fan of tax tails wagging accounting dogs. Tax follows, it doesn’t lead, and all that. As such I think it should be perfectly acceptable to roll up the interest, but according to HMRC (and indeed their opinion is based on case law) it isn’t.

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By kim.shaw-and-co.com
06th Jun 2024 21:54

A read of @Mr awol's linked Guidance will tell you what HMRC consider to be the case and why.

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By taxdigital
07th Jun 2024 07:37

Ruddles wrote:

There are some here, who appear not to understand the difference between debits and credits, that would argue that adding the interest to the debt amounts to payment of the interest.


Then the question is where does it say that a participator (edited: director) ought to pay the interest to reach the company’s account (no later than 05 April) ? Cash, bank transfer, bit coins or whatever.
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Replying to taxdigital:
By Ruddles
07th Jun 2024 11:36

ITEPA 2003 s175(2)(b)

It doesn't have to be paid by 5 April but it does need to be paid.

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Replying to Ruddles:
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By taxdigital
07th Jun 2024 12:11

Ruddles wrote:

ITEPA 2003 s175(2)(b)

It doesn't have to be paid by 5 April but it does need to be paid.

I know that. But my question is very specific: in the light of Rule 3 of s.686(1) or (for that matter s.18(1) which says:

"If the person is a director of a company and the income is income from employment with the company (whether or not as director), whichever is the earliest of—
(a)the time when sums on account of the income are credited in the company’s accounts or records (whether or not there is any restriction on the right to draw the sums)"

where does it say that the interest should be received by the company into their account, if that's what you meant by 'payment'?

( may not be posting for the next few days though)

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Replying to taxdigital:
By Ruddles
10th Jun 2024 10:31

Your question may be very specific but the provisions that you refer to deal with credits to the DLA in the context of timing of earnings. We're talking about debits to the DLA. One can argue for as long as one wants re the meaning of 'payment' - I'm not interested in whether the funds need to be in the company's bank account or not - a cash payment should do just as well. The simple fact is that merely increasing one's indebtedness to the lender cannot reasonably be considered to be payment of any part of that debt.

As I mentioned above, the treatment of a debit is not always the exact opposite of a credit.

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Replying to taxdigital:
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By Mr_awol
07th Jun 2024 11:57

Are you saying they dont need to pay by 5 April, or they dont need to pay at all?

If they can pay after 5 April then what would the deadline be?
(I'm not sure, i haven't considered it, but my gut feel is this might be acceptable as long as done in a 'reasonable timeframe' and in any case before the P11D submission deadline)

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Replying to Mr_awol:
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By joerowsell
10th Jun 2024 09:39

Mr_awol wrote:

Are you saying they dont need to pay by 5 April, or they dont need to pay at all?

If they can pay after 5 April then what would the deadline be?
(I'm not sure, i haven't considered it, but my gut feel is this might be acceptable as long as done in a 'reasonable timeframe' and in any case before the P11D submission deadline)

Isn't the deadline 5th July, because if the interest hasn't been paid by then, a BIK will arise?

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Replying to Mr_awol:
By Ruddles
10th Jun 2024 10:21

The deadline is 5 July to avoid the Class 1A charge. But can still be paid after that date to avoid/reverse the tax charge.

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By Di
10th Jun 2024 14:38

Ok, to clarify please (those who are answering), are you saying that if the loan interest is physically paid before P11d is submitted then the loan does not need to be included on the P11D?

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Replying to Di:
By Ruddles
10th Jun 2024 14:51

Yes - although I suggest that interest (at or above the Official Rate) is calculated on the daily basis.

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