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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: circumstances where the Inspector should elect for the alternative precise method of calculating the chargeable benefit: example

This example demonstrates circumstances where the Inspector should elect for the alternative precise method of calculating the chargeable benefit (see EIM26230).

A company’s accounting date is 31 March. The loan account of a director of the company was shown by the company’s accounts as having a balance of £4,000 at the beginning and end of the accounting year. The company makes an election for aggregation (see EIM26180).

When analysed, the loan account showed the following position during the accounting year.

  £
   
Balance outstanding at the beginning of the year 1 April 4,000
Advance to the director on 1 May 8,000
Advance to the director on 1 July 2,000
Total loans advanced 14,000
Less repaid by the director on 1 March 10,000
Balance outstanding at the end of the year on 31 March  
  4,000

The Inspector found that there had been no further advances or repayments over the five days up to 5 April following the company’s accounting year end. None of the loans were qualifying as they were all used to meet day to day living expenses (see EIM26136).

The Inspector gave notice of election for the alternative precise method of calculating the benefit (see EIM26240 onwards). She did so because the average of the loan to the director during the relevant tax year was slightly more than £12,000, although the balances at the beginning and end of the year were both £4,000. The appropriate official rate of interest for the year of assessment was 3.25%.

The chargeable benefit on the normal averaging method would have been

((£4,000 + £4,000) x 12 x 3.5) / (2 x 12 x 100) = £130                                                                                                                                     
 

The liability on the alternative precise method was

      £  
         
6 April to 30 April £4,000 for 25 days at 3.25% = 8.90  
1 May to 30 June £12,000 for 61 days at 3.25% = 65.17  
1 July to 1 March £14,000 for 244 days at 3.25% = 304.16  
2 March to 5 April £4,000 for 35 days at 3.25% = 12.46  
Chargeable benefit     390.69 Round down to £390

The director will be treated as having paid £390 interest on the loan. However this will have no effect on the final liability because none of the interest ranks for deduction or relief or any kind (see EIM26270).

Note that although the director made a repayment of £10,000 on 1 March, the maximum outstanding balance on that day was £14,000.