Home » Posts tagged 'loan'
Tag Archives: loan
Connected party loans are a problem area especially if the loan is impaired (ie the borrower may not be able to repay the debt)
Individual Loans written-off
If an individual makes a loan to a company and this is subsequently written-off, the company will have a non-trading loan relationship credit equal to the amount written off.
If the loan was made to an unquoted trading company, the individual will crystalise a capital loss equal to the amount of the loan written off. This will be available to set off against capital gains arising in the year of write-off or in subsequent years.ACCA
Loans swapped for Shares
Often Loans are swapped for equity and then subsequently a claim for negligible value is made.
A negligible value claim enables you to set a capital loss against your income (or against other capital gains if you have them) for earlier years and claim a tax refund.
Many negligible value claims are made by shareholder directors whose company has failed. Their claim is to offset the loss on the shares in their company against their directors’ wages for earlier tax years.
When a taxpayer owns shares which become of negligible value the taxpayer may make a claim under s24 TCGA 1992, resulting in a deemed disposal and reacquisition, which crystallises a capital loss.
Accounting standards require companies to assess their assets at the end of each period to ascertain whether there is objective evidence that particular assets are impaired. So if a loan can’t be repaid it would be impaired and may require a provision for bad or doubtful debts at the year-end which may well lead to the eventual release of the loans in question.
The problem is that for connected businesses this can create a double whammy on tax! tax relief is denied in respect of the debit to the creditor company’s profit and loss account. The credit recognised in the debtor company’s accounts can be taxable.
Where the creditor and debtor are connected companies, the connected party rules will apply to the release. This means that the release debit in the creditor’s accounts will not be allowable, because of CTA09/S354. Similarly, the credit in the debtor company’s accounts will not be taxable, since CTA09/S358 applies, unless the release is a ‘deemed release’ as defined in CTA09/S358(3) (CFM35440) or a ‘release of relevant rights’ under CTA09/S358(4) (CFM35510).
Since the release is, for both parties, dealt with under loan relationships, the priority rule in CTA09/S464 means that the creditor’s loss cannot be claimed, nor the debtor’s profit taxed, under the normal provisions for trading income. Nor can the credit in the debtor’s accounts be taxed under CTA09/S94 (debts incurred and later released).
Trade debts or loans between companies within a group may not uncommonly be released when either the debtor or the creditor company (or both) is dormant, as part of a ‘tidying-up’ exercise to enable dormant companies to be struck off. If this is all that happens, HMRC would take the view that the recording of an accounts profit – which is not taxed – in a dormant debtor company does not result in that company starting to carry on a business, and therefore does not start an accounting period under CTA09/S9. HMRC CFM41070
Two companies are connected for an accounting period if one controls the other or both are under the control of the same person (s 466) and companies are connected for the whole of their respective accounting periods if the control test is met at any time during those periods.
One possible solution could be a Deed of Release or Waiver executed in the accounting period in which the loan is released, but this would need to be properly drafted. The credit to the debtor company’s profit and loss account will then be able to be treated as non-taxable and as such avoid the double tax treatment.
The PayPal Working Capital fund will be trialled in the UK this autumn, with a more extensive rollout scheduled for 2015. Merchants (including eBay sellers) will be able to repay their advance with a share of their PayPal sales via card payments.
PayPal Working Capital is a loan of a fixed amount, with a single fixed fee. There are no due dates, minimum monthly payments, periodic interest charges, late fees, pre-payment fees, penalty fees, or any other fees. When you apply, simply select the amount you want — up to the maximum you qualify for. You choose the percentage of your sales that will be deducted from your PayPal account. (Deductions are made the day following each day of sales.) You’ll pay this percentage of your sales until your balance is repaid in full. You only make payments when you get paid.
PayPal Working Capital state that Working Capital offers major advantages compared with traditional ways of funding a business:
• Funding in minutes – PayPal’s strong relationship with its business customers means we can approve an advance based on their PayPal sales history. This means the customer completes a quick online application – there’s no need to spend hours gathering information about their business. And PayPal can make a decision and provide the funds in minutes.
• Pay when you get paid – Unlike traditional bank loans, PayPal Working Capital allows a business to repay the advance with a share of their PayPal sales. If they have a day without any PayPal sales that’s fine – they don’t repay anything that day.
• No credit check – PayPal Working Capital is a merchant cash advance against future sales – it’s not a loan – so no credit checks are needed and the advance does not impact on the customer’s business or personal credit record. There is a single, fixed fee that is displayed to the customer before they sign up. There are no interest charges or late payment fees.
Is this something your business will be able to use? or want to use?
If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.
But one thing you may not know is that connected parties can lend to the fund…
Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).
A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.
A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .
This is useful where you have paid in the maximum allowed pension contributions but you still have cash, so you could lend to your pension to buy a property.