Loan and sole traders

GoldenRetreiver

Hi I wonder if you could help me please. A computer chap I know set up his own business (sole trader) with a loan from his own private bank account so that he buy a car for the business. He is now in a position to pay his private account back the money he loaned his business - he has asked me where does it appear in his accounts - should it appear before gross profit (because he has already paid tax on the amount), or is it taken into account for tax purposes. And can you please let me know how should I tell him it should be entered?

deanshepherd

It's a capital transaction. It won't appear in the P&L at all.

Marga

yeah i would put this as capital introduced to the business

GoldenRetreiver

He has asked me what he should do because he is doing his online tax calculation. Can he deduct the amount of money he lent his sole trader business in order to buy the car, because he has transferred the money back from his business account back to his private bank account. He didn't and (I dont either) - because as he rightly says he had already paid tax on the 7,000 through wages before he set up his business, so by taking it out in the motor expenses part seemed the logical answer.
Confused.com!

Bluewednesday

He should not include it in the online tax calculation at all, he lent the money which went in as cash introduced (balance sheet) so when he withdraws it, it is drawings (also balance sheet).

He shouldn't have put the van in as a profit and loss item so therefore can't take it out as motor expenses.

groundy

Suggest he consults an accountant to avoid what could be a very costly mistake!

Vonni

It's not a profit / loss item and should not appear there it's a balance sheet item.

If he loaned the money to the business it would be shown on the balance sheet as a liability - Loan Account (CR) the debit entry being the asset of the van (DR).

At the point of repaying the loan - debit the loan account (DR) credit the bank account (CR).

The only entry in connection with a loan to a business would be for any interest proportion - so as this was in effect an interest free loan to his own company there is no interest charge to the P&L.

Therefore no requirement to include this within the tax calculation.

You're confused !

Bluewednesday

Can I just point out that this is a sole trader so it is really capital introduced and drawings.

Loan accounts really are for companies.

RichardK

GoldenRetreiver wrote: »

Hi I wonder if you could help me please. A computer chap I know set up his own business (sole trader) with a loan from his own private bank account so that he buy a car for the business. He is now in a position to pay his private account back the money he loaned his business - he has asked me where does it appear in his accounts - should it appear before gross profit (because he has already paid tax on the amount), or is it taken into account for tax purposes. And can you please let me know how should I tell him it should be entered?

Hi,

One way to deal with this is to bring the car into the business as capital introduced at cost if it has alway been used for his business or Net Realisable Value, if he has previously used it for private use only. This means if the car has been used privately for some time you can not enter it into the accounts at its original cost. You will need to determine the value of the car at the date you bring it into the accounts.

From what you have said, your friend has paid some PAYE or self assessment tax on some of the loan repayments? Was this before he brought the car into the business? He can claim back any tax paid on the interest element of the loan repayments only from when the car was used or introduced into the business.

This is done by way of the Self Assessment form. Here you can claim tax relief on any Loan Interest paid when the car was being used for business purposes through his private PAYE earnings or otherwise. You can enter the details of Loan Interest directly onto the Self Assessment form and your friend will get tax relief based on it.

Again, This loan interest must relate to when the car was being used for business or after it was brought into the accounts and you can not claim for loan interest before this time.

In this way he will get tax relief on the interest element of the loan repayments AFTER his business profits are calculated.

The other way of doing this is to bring the loan into the accounts and in which case he will get tax relief on the interest payments by way of his business profits. In this way you will not have to enter a separate figure for Loan Interest on the Self Assessment form as it will have already be included in his business expenses and will have reduced his net profit figure accordingly.

On a sole trader Balance Sheet there is often a separate accounts for "Loans and other overdrawn bank accounts" and "loans due after more than 1 year". This helps clarify which loans are which especially if you have more than 1 loan.

Remember your friend will also be able to claim capital allowances on the car.

IMPORTANT: If you bring the car into the accounts as CAPITAL and do not make any reference to the INTEREST you are paying on the loan repayments, you will not be awarded tax relief on that interest.

I suggest you bring the loan into the accounts and set up a Loan Account on your balance sheet if you can and then show it as paid when your friend clears the loan.

Example: Your friend may have used the car for business use for the last 6 months of the accounting period then you can claim tax relief on that 6 months worth of loan intererst.

You should not have to submit a balance sheet to HMRC just a P&L. This is normal practice for sole traders. however, you will want to keep a balance sheet for your own records or in case HMRC ask for it at some time.

I hope this helps

qwerty

Capital and drawings, not a loan

GoldenRetreiver mentions that this is a sole trader introducing money into the business account from their private accounts as a 'loan'.

Although it has been described as a loan, it is actually capital introduced. When the money is subsequently withdrawn from the business it is drawings.

Interest on the loan could be shown in the accounts if the sole trader wishes, but he cannot claim any tax relief for this interest as he is not actually paying interest as there is no actual loan - they money has come from his own savings. Therefore, it is probably best not to show interest.

On the other hand, say he had taken out a loan for which the proceeds were paid into his personal bank account and this was used to buy company assets, then interest could be claimed in that situation. However, that is not the case here (well, not from what I understand from the OP).