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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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The benefits code; beneficial loans: calculation of the cash equivalent: the alternative precise method

Section 183 ITEPA 2003

The cash equivalent of the benefit of most beneficial loans is calculated normally using the averaging method (see EIM26210). However either the employee or the Inspector can elect to use an alternative method, the precise method.

See EIM26245, which tells you to consult an Inspector when use of the averaging method would put tax at risk.

The calculation using the precise method is more complex. It does however give an exact result. It also overcomes the problem of fluctuating loans mentioned in EIM26225.

Broadly the precise method involves:

  • for each day in the tax year that the loan (or loans if they are to be aggregated, see EIM26180) is outstanding
  • dividing the official rate for that day (see EIM26104) by 365 and
  • applying that to the maximum balance (see EIM26212) on the loan for that day (or the total of the maximum balances if loans are aggregated).

Any interest paid on the loan for the tax year is then deducted to arrive at the chargeable benefit for that year.

See EIM26231 for a detailed step-by-step approach to calculation using the precise method.

See EIM26300 for a list of examples showing the precise method of working out the cash equivalent of a beneficial loan.