Any Answers Answered: Inter-company loans and trivial benefits

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In their latest video TAXtv hosts Giles Mooney and Tim Good take look at two questions from AccountingWEB’s Any Answers board.

To watch the full video of Good and Mooney answering readers’ questions, click here or scroll down to the bottom of the page.

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Inter-company loan?

AccountingWEB member toan4 took to the message boards to raise the age-old issue of inter-company loans.

“I have a set of accounts prepared by my accountant for two companies (A & B for sake of discussion) within which I am both director and only shareholder. He has proposed to take advantage of some losses in company B, to reduce the tax exposure in company A, by using an intercompany charge/loan. However, for the year in question, there was no actual transfer of funds between the two companies. Is this is an appropriate/legal way to proceed?”

Giles Mooney took issue with the title, stating that the question was more about management charges.

Tim Good agreed. “What the accountant is trying to do is get the loss in A Ltd removed by A Ltd charging B Ltd a management fee. It comes in as income in A Ltd, extinguishes the loss and no corporation tax in A Ltd (because it’s covered by the loss)”, he said.

“B Ltd then gets a corporation tax deduction for the charge, no money changes hands so the double entry in A Ltd will be credit-income with that management charge, debit-debtors and corresponding double entry in B Ltd.

“The question is will B Ltd get corporation tax relief?” Good continued. “It can debit its profit and loss account with that management charge, but the Revenue looking at it will say ‘that wasn’t incurred wholly and exclusively for the purpose of the company’s trade’, and therefore disallow the corporation tax deduction in B Ltd.”

This backed up the answer given by paulwakefield1 in his reply, who said, “any cross charge should be commercially justifiable.”

Good and Mooney also discussed a number of other ways in which the accountant advising the shareholder/director could get around the issue in future.

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Employee gifts and trivial benefits

MeIN asked what at first appeared to be a simple question about trivial benefits:

“Are employee gifts and directors’ gifts (up to the maximum of £300) deductible for corporation tax if they are not entertaining eg clothes vouchers for example.”

Mooney immediately highlighted the fact that the focus on the benefits to the employee – the fact that there is no tax to worry about as far as they’re concerned – meant that plenty of people, including himself, had taken their eye off the corporation tax completely.

Good felt that the basic corporation tax rules have to apply. “If your company has a 31 December year end and provided these benefits last December, say, trivial benefits under the rules that came in last year could be director/shareholders up to £300, for employees no upper limit but no more than £50 per throw (plus various other conditions to be met),” said Good.

“We then didn’t put them on P11Ds that were filed earlier this summer, but now we’re thinking about the corporation tax…is there an add-back required?

“The basic corporation tax rules have to apply. Is the expense occurred, wholly and exclusively, for the purpose of the trade? Ordinarily, any sort of employee benefit and director fees will be treated as occurred wholly and exclusively and therefore corporation tax deductible.”

However, Good warned that one point to watch out for is if it’s disallowable under some other part of the corporation tax code.

Good and Mooney then highlighted a number of disallowables, including business and staff entertaining.

To watch the full video click play in the box below.

For the latest episode of TAXtv visit PTP Interactive. TAXtv is a monthly tax update programme available as an annual subscription from £199, (11 issues plus special editions) to view online, download from the internet or watch on DVD.

About Tom Herbert

Tom is acting editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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