Loans to Employees

These flashcards cover the key concepts regarding loans to employees, including taxation rules, calculations, exemptions, and related consequences.

What is a taxable cheap loan?

A loan made to an employee by their employer with low or no interest, which creates a taxable benefit.

How is the cash equivalent of a taxable cheap loan calculated?

The difference between the interest that would have been payable at HMRC's official rate and any interest actually paid.

What is the official rate of interest (ORI) for calculations?

The rate set by HM Treasury and published by HMRC, which is currently 3.75%.

What are the two methods for calculating the cash equivalent of a taxable cheap loan?

The average method and the strict method.

What is the aggregate exemption limit for loans to employees?

An aggregate of £10,000 or less throughout the tax year means no taxable benefit arises.

What constitutes a loan under ITEPA 2003?

Any form of credit, including goods or services supplied at market value with extended payment terms.

What relatives can be included as beneficiaries for employment-related loans?

Spouse, civil partner, parent, child, sibling, and their spouses/civil partners.

When is a loan made by a company treated as tax-exempt?

When it is made on ordinary commercial terms, even if the rate is below the ORI.

What happens when a loan is written off by the employer?

It is usually treated as earnings of the employee and subject to income tax.

What is the treatment of loans made to participators in close companies?

They may trigger corporation tax for the company under CTA 2010, s.455.

What is the penalty tax rate on loans under s.455?

33.75% of the loan amount.

What is 'bed and breakfasting' regarding loans?

Repaying a loan shortly before borrowing the same amount again to avoid tax.

What determines if a loan to an employee is an employment-related loan?

It must be provided to an employee or their relative unless the relative is also an employee.

How should loans be reported on P11D forms?

Taxable cheap loans must always be reported, regardless of voluntary payrolling.

What happens to loans still outstanding after an employee's death?

There is no tax charge as they are treated as no longer outstanding.

What must be done if two or more employees hold a loan jointly?

The cash equivalent should be split fairly between them.

Under which circumstances can the strict method of calculation be opted for?

When either the taxpayer or HMRC insists due to significant distortion of results using the average method.

What are the conditions for loans to be ignored under employment expenses?

Loans not exceeding £1,000 and spent within six months, with proper accounting.

What is the calculation process for the average method of loan benefit?

(Loan at start + Loan at end) / 2 x Average ORI.

What is the impact of a loan being replaced by another loan?

Both loans are treated as a single loan for average method calculations.

What action can a company take if a loan is repaid or written off?

Claim a tax refund on the portion of the loan repaid under s.455.

What is the classification of a participator in a close company?

Anyone with share capital, voting rights, or is a loan creditor of the company.

In the context of close companies, what is an associate?

Immediate family members and business partners, among others.

What occurs if a loan is written off following an employee's death?

No tax charge arises on the amount written off.

How long does a company have to claim a refund for tax paid on a loan?

Claims must be made within four years of the end of the accounting period.

What can trigger a double taxation scenario on a loan written off to a participator?

If the company has already paid tax on the loan under s.455.