Loans

Dawny

I've just taken on a partnership to compile the annual accounts and tax return. The partnership is between a husband and wife and they have been running a business together for a few years and preparing their own accounts.

At the start up, the duo took out a bank loan to cover living costs whilst the business got going, and to cover the cost of some equipment. They didn't capitalise the equipment and instead have been deducting the full capital and interest payments from their turnover in the accounts.

I believe the correct action would of been to capitalise the part of the loan which purchased the equipment, the part of the loan for living expenses should of gone to drawings, and only the interest should of been a deduction from turnover. Is that correct?

In which case I'm not sure what I should do with prior years where the wrong deduction would of been made in the accounts.

Any advice would be very welcome!

Thank you.

paulstafford

Was the full amount of the loan paid into their business bank account? If that is the case then I would claim all the interest. They used the loan as cash flow until sales pick up.

The capital element of the repayments can't be claimed

Have they claimed capital allowances on the equipment?

Dawny

I've just picked up some accounts that a previous accountant had compiled, but the client has been doing his own accounts for a couple of years since then!

The client has been claiming the full capital payment since completing the accounts themselves.

There was some equipment purchased with the loan but it all seems to have been written off now.

I'm not sure where the part of the loan that went towards living expenses was posted to. The previous accountants did show a bank loan as a liability though. To complicate things further, I don't have a copy of the balance sheet since 2002!

The client doesn't have a business bank account.

I am happy to claim all the interest as the loan is in the name of the business, but with the information I have I think I can only complete an Income and Expenditure summary for the tax return, is this sufficient for the HMRC?

Thank you!