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HMRC internal manual

Employment Income Manual

The benefits code: beneficial loans: when balances may be netted off

An employee (except for 2015/16 and earlier one in an excluded employment (see EIM20007)), may lend money to his or her employer as well as borrowing from it. It is even possible for both things to happen at the same time.

For example, a director who has loaned money for a specific purpose to the company of which he is a director, and who appears as a creditor in the company’s accounts, may at the same time have a current account with the company that is overdrawn. In such cases it is often claimed that there is no chargeable benefit resulting from the overdrawn loan account because the amount owed to the company can be set against the debt that the company owes the director. No such set-off is possible. The legislation only requires the aggregation of loans for which a cash equivalent has to be determined. A debt from the company to the director does not require the calculation of a cash equivalent.

However, in many cases the amounts due to and from the employer are only kept separate for bookkeeping reasons, and are in reality a single balance that could equally well be shown in the employer’s accounts as a single running debit or credit amount. In such cases you should not object to netting off amounts shown in the books as loans due to and from the same employee.

But you must not set a loan due from one employee against an amount that the employer owes to somebody else (for example the employee’s spouse). These are not loans between the same borrower and lender.

An employee does not make a loan to his or her employer by being paid salary monthly in arrears if he or she is only entitled to salary at the end of the month (see Williams v Todd (60TC727)).

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)