EIM26313 - The benefits code: beneficial loans: circumstances where the Inspector should elect for the alternative precise method of calculating the chargeable benefit: example
This example demonstrates circumstances where the Inspector should elect for the alternative precise method of calculating the chargeable benefit (see EIM26230).
A company鈥檚 accounting date is 31 March. The loan account of a director of the company was shown by the company鈥檚 accounts as having a balance of 拢4,000 at the beginning and end of the accounting year. The company makes an election for aggregation (see EIM26180).
When analysed, the loan account showed the following position during the accounting year:
- balance outstanding at the beginning of the year 1 April: 拢4,000
- advance to the director on 1 May: 拢8,000
- advance to the director on 1 July: 拢2,000
- total loans advanced: 拢4,000 + 拢8,000 + 拢2,000 = 拢14,000
- less repaid by the director on 1 March: 拢10,000
- balance outstanding at the end of the year on 31 March: 拢14,000 - 拢10,000 = 拢4,000
The Inspector found that there had been no further advances or repayments over the five days up to 5 April following the company鈥檚 accounting year end. None of the loans were qualifying as they were all used to meet day to day living expenses (see EIM26136).
The Inspector gave notice of election for the alternative precise method of calculating the benefit (see EIM26240 onwards). They did so because the average of the loan to the director during the relevant tax year was slightly more than 拢12,000, although the balances at the beginning and end of the year were both 拢4,000. The appropriate official rate of interest for the year of assessment was 3.25%.
The chargeable benefit on the normal averaging method would have been:
- ((拢4,000 + 拢4,000) x 12 x 3.25) 梅 (2 x 12 x 100) = 拢130
The liability on the alternative precise method was:
| Period | Calculation | Amount (拢) |
|---|---|---|
| 6 April to 30 April | (拢4,000 梅 365 days) 脳 25 days 脳 3.25% | 8.90 |
| 1 May to 30 June | (拢12,000 梅 365 days) 脳 61 days 脳 3.25% | 65.17 |
| 1 July to 1 March | (拢14,000 梅 365 days) 脳 244 days 脳 3.25% | 304.16 |
| 2 March to 5 April | (拢4,000 梅 365 days) 脳 35 days 脳 3.25% | 12.46 |
Chargeable benefit : 拢8.90 + 拢65.17 + 拢304.16 + 拢12.46 = 拢390.69 (round down to 拢390)
The director will be treated as having paid 拢390 interest on the loan. However this will have no effect on the final liability because none of the interest ranks for deduction or relief of any kind (see EIM26270).
Note that although the director made a repayment of 拢10,000 on 1 March, the maximum outstanding balance on that day was 拢14,000.