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29 November 2000
Dangerous ground
In the tax case Stones v Hall [1989] STC 138, the question was raised as to whether an interest-free loan provided to a company by a director could constitute 'making good' any part of the benefit in kind charge raised on the provision of living accommodation by the company for the director.
The judge did not address this point in reaching his decision, because it had not been aired before the Special Commissioner who originally heard the case, but suggested that no 'making good' could have taken place on the grounds that there was no agreement in place.
In the tax case Stones v Hall [1989] STC 138, the question was raised as to whether an interest-free loan provided to a company by a director could constitute 'making good' any part of the benefit in kind charge raised on the provision of living accommodation by the company for the director.
The judge did not address this point in reaching his decision, because it had not been aired before the Special Commissioner who originally heard the case, but suggested that no 'making good' could have taken place on the grounds that there was no agreement in place.
Dangerous ground
In the tax case Stones v Hall [1989] STC 138, the question was raised as to whether an interest-free loan provided to a company by a director could constitute 'making good' any part of the benefit in kind charge raised on the provision of living accommodation by the company for the director.
The judge did not address this point in reaching his decision, because it had not been aired before the Special Commissioner who originally heard the case, but suggested that no 'making good' could have taken place on the grounds that there was no agreement in place.
My client is considering providing living accommodation for a director who would in return give the company an interest-free loan as part of the arrangement.
Have any readers experience of such an arrangement being accepted by the Inland Revenue as a valid means of 'making good' part or all of the assessable benefit in kind and, if so, how should an appropriate agreement be phrased?
(Query T15,717) — Huggy Bear.
Answers:
In Taxation, 27 February 1992 at page 531, a correspondent reported that the Revenue had recently accepted, after a reference to head office, that making good does not have to be contemporaneous with the year of benefit. In a back duty case, the Revenue had permitted benefits in kind relating to farm accommodation to be reduced to nil amounts on the directors agreeing to allow the assessable sums to be (later) charged to their loan accounts with the company. Hence interest and penalties were avoided.
However, 'Huggy Bear' is seeking to match the value of the interest forgone with the accommodation benefit, rather than any part of the principal of the loan. The probable validity of that suggestion is supported by the Stones case mentioned, but only if there is a clear agreement linking the value of the benefits to the amount of interest forgone, perhaps by exchange of letters and board minute.
Of course, the company could instead pay interest on the loan in an amount matching the benefits computed at the year-end. The matter becomes more difficult if further charges arise under section 146, Taxes Act 1988.
Doubtless the notion of a direct set-off reflects the wish to escape the tax burden that would arise on actual payments of interest. It is therefore recommended that a dispensation be applied for under section 166, Taxes Act 1988 with a view to obtaining a favourable written ruling from the Revenue. — Lane.
Sauce for the goose is sauce for the gander. If an interest-free loan, or one at a reduced rate of interest, by a company to its director or employee is a supply of value, or benefit, equal to the undemanded interest, then a similarly cost relieved loan to the company is also a delivery of money's worth. Even without a quid pro quo contract, the lack of interest can be represented as a making good of the cost of accommodation. There would probably be debate with the Inspector, but with a reasonable chance of a favourable decision by the Commissioners.
Reference to a formal agreement by the judge in Stones v Hall [1989] STC 138 was sensible. A written contract to provide an interest-free loan in exchange for accommodation is good insurance. It makes everything clear, and could shorten — or even avoid — the debate. But there is always the risk that the Inland Revenue will seek to assess the director to interest received gross and in kind equal either to the cost of providing the accommodation or to interest at the standard rate on the loan.
This is not a secure area. — Man of Kent.
Editorial note. The wording and construction of the agreement is paramount in importance. Self assessment and corporation tax self assessment complicate the issue, as this is a case that cries out for a pre-transaction ruling.
In the tax case Stones v Hall [1989] STC 138, the question was raised as to whether an interest-free loan provided to a company by a director could constitute 'making good' any part of the benefit in kind charge raised on the provision of living accommodation by the company for the director.
The judge did not address this point in reaching his decision, because it had not been aired before the Special Commissioner who originally heard the case, but suggested that no 'making good' could have taken place on the grounds that there was no agreement in place.
My client is considering providing living accommodation for a director who would in return give the company an interest-free loan as part of the arrangement.
Have any readers experience of such an arrangement being accepted by the Inland Revenue as a valid means of 'making good' part or all of the assessable benefit in kind and, if so, how should an appropriate agreement be phrased?
(Query T15,717) — Huggy Bear.
Answers:
In Taxation, 27 February 1992 at page 531, a correspondent reported that the Revenue had recently accepted, after a reference to head office, that making good does not have to be contemporaneous with the year of benefit. In a back duty case, the Revenue had permitted benefits in kind relating to farm accommodation to be reduced to nil amounts on the directors agreeing to allow the assessable sums to be (later) charged to their loan accounts with the company. Hence interest and penalties were avoided.
However, 'Huggy Bear' is seeking to match the value of the interest forgone with the accommodation benefit, rather than any part of the principal of the loan. The probable validity of that suggestion is supported by the Stones case mentioned, but only if there is a clear agreement linking the value of the benefits to the amount of interest forgone, perhaps by exchange of letters and board minute.
Of course, the company could instead pay interest on the loan in an amount matching the benefits computed at the year-end. The matter becomes more difficult if further charges arise under section 146, Taxes Act 1988.
Doubtless the notion of a direct set-off reflects the wish to escape the tax burden that would arise on actual payments of interest. It is therefore recommended that a dispensation be applied for under section 166, Taxes Act 1988 with a view to obtaining a favourable written ruling from the Revenue. — Lane.
Sauce for the goose is sauce for the gander. If an interest-free loan, or one at a reduced rate of interest, by a company to its director or employee is a supply of value, or benefit, equal to the undemanded interest, then a similarly cost relieved loan to the company is also a delivery of money's worth. Even without a quid pro quo contract, the lack of interest can be represented as a making good of the cost of accommodation. There would probably be debate with the Inspector, but with a reasonable chance of a favourable decision by the Commissioners.
Reference to a formal agreement by the judge in Stones v Hall [1989] STC 138 was sensible. A written contract to provide an interest-free loan in exchange for accommodation is good insurance. It makes everything clear, and could shorten — or even avoid — the debate. But there is always the risk that the Inland Revenue will seek to assess the director to interest received gross and in kind equal either to the cost of providing the accommodation or to interest at the standard rate on the loan.
This is not a secure area. — Man of Kent.
Editorial note. The wording and construction of the agreement is paramount in importance. Self assessment and corporation tax self assessment complicate the issue, as this is a case that cries out for a pre-transaction ruling.
