directors loan interest

shelleym

I Have a new client with a ltd company on his balance sheet he has a directors loan account of £230,071.00 and he is advising me he would like to charge his company interest of £14,285.00 this creating a loss of 11,000.00 on the profit and loss account, I have advised him that 20% tax is deductable on this interest payment and must be paid to hmrc however he is saying that because the company is making a loss and no money is changing hands then he doesnt need to do this, please can someone give me more advice on this as i see it that he would have made a profit off £3285.00 but he wants to charge the company this interest which reduces the profit to a loss and i feel a little unsure about submitting his return withou first clarifying what to do with this interest payment. many thanks in advance to anyone that can help

Ellabobbin

Hi, I haven't actually ever paid interest on a DLA but here are my thoughts... He can claim interest at a commercial rate - the figures mentioned suggest 6.2% is being claimed which is probably ok... But it will have to be paid with 20% interest deducted, which should be reported on form CT61 and paid to HMRC within 14 days of the quarter end. You will have missed this particular boat if his year end is on/before 30 June, though perhaps you could accrue the interest in the accounts and pay/report this quarter... Hopefully someone will confirm if the accrual is permissible for interest paid to a director - I did a little googling and a couple of entries on accounting web suggested it might be...

shelleym

thank-you very much, this had made me think that his idea that the 20% tax does not need to be paid until the interest payment is actually paid, however he wants the interest showing in order to reduce the profit to a loss and this is what is making me wary as he would need to pay tax on the profit but as he is paying himself interest this reduces the profit to a loss, so basically he is saying the interest payments are acruing and he will pay himself the interest when profits are available therefore he doesnt need to show these interest payments on his personal tax return as they are not paid yet so there will need to be an an entry on the balance sheet for accrued interest payments rather than adding it directly in to the directors loan account this is starting to piece together i think, any more views would be appreciated.

burg

The interest may well not have been paid but it would have been earned so would be declarable on his personal tax return. Either way he will have at least a 20% tax liability.

shelleym

Hi Burg thank-you for your response, this is what is baffling me and i cant seem to find any information on line do you know where i could find out the information i am seeking,