At the yearend there may be the need to deal with the overdrawn directors loan account, assuming all other options e.g. voting dividends, bonus etc have all been exhausted , you may be left with a situation where there is still an overdrawn balance and consideration then must be given to minimising the beneficial loan charge, HMRC will expect Interest to be charged on the overdrawn loan, so what interest should be charged to reduce or eliminate the benefit Charge.
The employment-related loan legislation is designed to tax the benefit of a loan to an employee or officer where the loan value is over £10,000 at any time in the tax year and either no interest is paid or interest below the official rate, currently 2.5% is paid by the borrower.
Although there is often an area of overlap between the beneficial loan charge and the loan to participators legislation in s.455 they are separate and distinct issues.
s.175 states that the benefit in kind is reduced by the amount of the interest paid. In HMRC’s view the following conditions must be met for the interest to have been paid.
- The interest must be paid.
- The interest must be paid for the year of assessment, but not necessarily in the year of assessment.
- HMRC require an obligation to pay the interest during the tax year
HMRC do not accept that interest that is capitalised has actually been paid . HMRC’s view which refers to supporting case law is that capitalising interest does not constitute a payment of interest and so the s175 charge still arises.
It is also important to note that, HMRC’s view is that interest cannot arise except under an obligation, Thus, a voluntary payment cannot be interest. Considering this, we would advise that a formal loan agreement be put in place in order to prove this obligation exists, it is also worth noting that interest cannot be backdated, the obligation to pay interest must be in place throughout the period concerned.
The information contained in this article is for general information purposes only and does not constitute advice, Whilst we endeavour to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose. We recommend that professional advise should be taken from a suitably qualified expert before undertaking any action.