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Loan or pay?

21 March 2007
Issue: 4100 / Categories: Forum & Feedback

I have a client whose business was incorporated on 1 February 2003. There was a shortfall of assets to liabilities on incorporation and this was duly debited to a director's loan account.
To avoid a benefit in kind charge, interest at the official rate has been debited to this director's loan account on a monthly basis and has accordingly been included in the company's accounts on which it has paid corporation tax.
No written agreement exists, but the interest has always been shown clearly in the company's accounts, which have been ratified by the company at its AGM.

I have a client whose business was incorporated on 1 February 2003. There was a shortfall of assets to liabilities on incorporation and this was duly debited to a director's loan account.
To avoid a benefit in kind charge interest at the official rate has been debited to this director's loan account on a monthly basis and has accordingly been included in the company's accounts on which it has paid corporation tax.
No written agreement exists but the interest has always been shown clearly in the company's accounts which have been ratified by the company at its AGM.
At a recent PAYE compliance visit the Inspector said he was concerned that our client had 'not entered into a legally binding loan agreement'. In his opinion if the monthly debits are not legally a loan the amounts are probably pay. PAYE should have been deducted...

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