Interest Free Loan Cash Equivalent

jilt

IFL of £12045 made 06.04.07, not discharged during year. On previous P11D the cash equivalent is calculated at £376. As the official rate of interest for 07-08 was 6.25% I would have calculated a benefit of £753. Can someone please advise where I am going wrong :blushing:

slick

Interest Free Loan Cash Equivalent

Hi Jilt...the 2007/08 interest free loan was calculated on an average basis resulting in the cash equivalent of £376 therefore, you need to divide £753 by 2!:001_smile:

jilt

Hi Slick

This was how I worked it out:

A Max balance on 05.04.07 £12045
B Max balance on 05.04.08 £12045
C A + B = £24090
D Divide C by 2 = £12045
E Number of complete tax months = 12
F Multiply D by E and divide by 12 = £12045
G Official rate of interest 6.25%
H Multiply F by G = £752.81
J Interest paid in year = 0.00
K Cash Equivilent of loans H - J = £752.81

Am I being really thick, what on earth am I missing?

I really must get more sleep :laugh:

Nilesh Mandvia

jilt wrote: »

Am I being really thick, what on earth am I missing?

:laugh:

The benefit you calculated is correct. "slick" explanation is logic but the benefit should be £753.00. Was employee charged any interest by the employer? Or Did employee paid any money towards interest cost to the employer?

Nilesh

jilt

Nilesh Mandvia wrote: »

The benefit you calculated is correct. "slick" explanation is logic but the benefit should be £753.00. Was employee charged any interest by the employer? Or Did employee paid any money towards interest cost to the employer?

Nilesh

No interest paid that I can see, I will double check with previous accountant.

Many thanks, glad to know I'm not completely stupid :laugh:

jilt

Apparently, as no previous P11d's had been done they put in a zero opening balance!!!!

And that was a large firm of chartered accountants! Hope for me yet

deanshepherd

I think Slick has given you your answer.

Are you sure the loan was advanced on 6th April 2007? That was a bank holiday!

My assumption would be that either:

i) The loan really existed before that date in which case there should have been a P11D for 2006/07; or

ii) The loan was advanced after that date in which case the previous chartered firm were entirely correct to use the averaging method.

jilt

deanshepherd wrote: »

My assumption would be that either:

i) The loan really existed before that date in which case there should have been a P11D for 2006/07; or

ii) The loan was advanced after that date in which case the previous chartered firm were entirely correct to use the averaging method.

After discussing it with the previous accountant, yes there should have been a P11d for 2006/07. And there was a typing error in my opening post, sorry :blushing:

Many thanks for everyone's help.

Nilesh Mandvia

jilt wrote: »

Apparently, as no previous P11d's had been done they put in a zero opening balance!!!!

And that was a large firm of chartered accountants! Hope for me yet

Entering zero as an opening balance is wrong. As per S182 of ITEPA 2003,

The normal method of calculating for the purposes of this chapter the amount of interest that would be payable on a loan for a tax year at the official rate is as follow
Step1

Calculate the average amount of the loan outstanding during the tax year—
1. Find the maximum amount of the loan outstanding on 5th April preceding the tax year or, if the loan was made in the tax year, on the date it was made.
2. Find the maximum amount outstanding on 5th April of the tax year or, if the loan was discharged in the tax year, on the date of discharge.
3. Add these amounts together and divide the result by 2.

You can not use zero if there was no balance on 06/04 instead you have to use the amount on the date it was lent to an employee.

http://www.opsi.gov.uk/acts/acts2003/ukpga_20030001_en_9#pt3-ch7-pb3-l1g182

So, you are correct in calculating the benefit.

HTH

Nilesh