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HMRC revises guidance on director’s loans

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21 Jun 2016

HMRC has revised their 'directors' loan accounts toolkit' in light of the change to UK GAAP accounting rules for debt instruments to clarify the tax impact of these changes

In their revised toolkit, HMRC notes that, when making loans to/from directors/employees where there is no explicit interest rate or if the rate is not charged at market rate, the prescribed accounting treatment depends on which accounting framework has been adopted by an entity.

  • Where an entity applies either FRS 102 Financial Reporting Standard applicable in the UK and Ireland or FRS 102 Section 1A Small Entities then such loans are required to be accounted for as if they were a loan with a market rate of interest.
  • Where a company applies FRS 105 Financial Reporting Standard applicable to the Micro-entities Regime, there is no requirement to account for such loans as if they were a loan with a market rate of interest. Instead such loans would initially be recorded at the amount borrowed/advanced.

However, the choice of accounting treatment does not affect the amount chargeable for tax purposes, which is still determined by Section 455 of the Corporation Tax Act 2010.

S455 is a key anti-avoidance weapon for owner-managed companies. Without it, owner managers could easily avoid a tax charge by arranging for ‘their’ company to lend them funds (as opposed to paying a ‘taxable’ bonus or dividend).

The updated guidance is available on the HMRC website.

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