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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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The benefits code: beneficial loans: qualifying and non-qualifying loans

Section 180 (4) and (5) ITEPA 2003

EIM26136 explains that a loan on which the whole of any interest paid would qualify for tax relief under the specified provisions will be exempt from being treated as a taxable cheap loan.

This should not be confused with the rules in section 180(5) ITEPA 2003 which define “qualifying loans” solely for the purpose of identifying “non-qualifying loans” as used in the rules relating to the small loans threshold of £10,000 (£5,000 for 2013/14 and earlier tax years) (EIM26140 onwards).

Section 180(4) ITEPA defines a non-qualifying loan as a taxable cheap loan which is not a qualifying loan. So you need to be able to identify a qualifying loan in order to understand the nature of a non-qualifying loan.

A qualifying loan for this purpose is defined as one for which either whole or part of the interest (had any been paid) would have qualified for relief as follows:

  • interest which would be eligible for relief under section 353 ICTA;
  • interest which would be eligible for relief under section 383 ITA 2007;
  • interest which would be deductible in computing the borrower’s profit’s from a UK trade, profession or vocation carried on by the borrower, or
  • interest which would be deductible in computing the borrower’s profits from a Property Income business (income from land in the UK) carried on by the borrower.

For an explanation of how non-qualifying loans are taken into account in applying the small loans threshold, see EIM26140 onwards.

It is worth noting that qualifying loans as defined above will include both

  • loans on which the interest would fully qualify for relief and that are therefore exempt from being treated as cheap taxable loans, as outlined in EIM26136, and
  • loans on which the interest would only partially qualify for relief.

Where only part of the interest on the loan qualifies for relief, it follows that some of the interest would not be allowable as a tax deduction in the borrower’s SA calculation. That amount of any cheap loan will therefore be capable of being charged to tax. Since the entire loan is however deemed to be employment related, the correct treatment is to bring the entire loan into charge as a taxable cheap loan. The taxpayer can then claim relief on the appropriate parts through their SA return.

It is therefore possible to have a loan which is described as a qualifying loan under S180(5) brought into charge as a taxable cheap loan under S175(1) ITEPA 2003.