Ensure clients understand the basics of interest-free loans under P11D
An interest-free loan to an employee (or director) is chargeable to tax if it exceeds £10,000 at any time during the tax year. The amount chargeable is the rate of interest set as the ‘official rate’. Since 5 April 2020, this has been 2.25% (2% from 6 April 2021) and is charged on the average amount outstanding during the fiscal year.
Any amount written off is chargeable as a payment of emoluments.
The de minimis exemption of £10,000 (above) does not apply to a loan to a participator in a close company. If such a person has a loan or advance nine months after the end of the accounting period in which the advance or loan was made, a charge will arise under section 455 Corporation Tax Act 2010 (CTA 2010) which is 32.5% of the amount outstanding.
The benefit in kind charge will not be made if:
For the purposes of establishing whether a taxable benefit arises, it is necessary to aggregate all loans and advances. As well as straightforward loans, the following are also regarded as loans:
A civil servant was required by his employers to move to London from Wigan. He received an advance of salary which was interest-free and repayable on demand in certain circumstances. It was repaid by monthly instalments over ten years and he was assessed on it. He appealed, contending that he received no benefit from it. This was rejected by the court, holding that the true nature of the advance was a loan from the employer. Williams v Todd [Ch D 1988, 60TC 727]. Further details on advances of expenses can be found at EIM26155.
There are two methods of calculating beneficial loan interest:
The averaging method automatically applies unless the employee elects for the alternative precise method, or the Inspector gives notice that he or she intends to use the precise method. An example of the calculation using the average method can be found at EIM26311.
If interest is charged on loans over £10k and no benefit in kind arises, the amounts are still reported on P11D.
Our recent article on how to avoid common errors and omissions when submitting P11Ds is worth looking at before making any submissions.
ACCA’s full guide to benefits and forms P11D is available from our website.