Beneficial Loans and Interest Paid

In calculating the amount to charge, a reduction may be made for interest paid.

Three conditions must be satisfied for a deduction to be competent:

• the interest must have actually been paid
• it must have been paid for the year of assessment
• it must have been paid under an obligation to pay interest that existed during that year.

For the first bullet point consider what is meant by “paid”. Physically paid will count.

Interest may be “rolled up”. The act of debiting the loan account itself will not count. Capitalisation of interest was considered in the cases of CIR v Oswald (as trustee of the Cosier Settlement) 26TC435) and Minsham Properties Ltd v Price (63TC570).  The conclusion drawn was that this did not change the nature of the sum, it was still interest. What needs to be considered is the fact that the interest is actually paid.

A debit to an account with a debit balance will constitute a debt and, therefore, cannot be said to be paid as it is still owed.

A debit to a loan account in credit, however, can be treated as paid.

Care must be taken regarding this. The date of the loan account adjustment is crucial. It is very important to record such debits in the books and records, particularly proof of the date of the debit may be required.

The second bullet point also needs careful consideration. This point does not mean the interest must be paid in the tax year, merely for the tax year. Thus, it must be clear in the records for what tax year the payment is made. It may be after the end of the year—provided it is for the year in question.

When completing forms P11D, only interest paid up to the date of filing and by the P11D filing deadline can be deducted. Thereafter, any qualifying payment may be made. This does not change the P11D, so class 1A NIC will not reduce. Claims to overpayment must be made through the self-assessment system within the normal deadlines. That is within four years from the end of the year of assessment.

The third bullet point outlines the fact that there must have been an obligation to pay the interest in the first case in force during the year of assessment. It is therefore crucial to draw up a loan agreement detailing the obligation to pay interest. Indeed, HMRC state at EIM26257 – The benefits code: beneficial loans: calculating the cash equivalent: late interest payments: doubt about obligation to pay interest – HMRC internal manual – GOV.UK:

Do not admit a claim to relief in any case where:

• you are not satisfied that the employee was under a legal obligation to pay interest on an apparently interest-free loan, or
• so-called interest is paid under a retrospective agreement entered into after the end of the income tax year concerned.

Tax Advisor
John Riseborough

For more information, please contact us at: consultancy@vantagefeeprotect.com