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What happens when benefits in kind loans are not exempt from reporting.

If the loans are not exempt from reporting they should have been included on the P11d of the employee.

The normal method of calculation is to take the average for the year:

  1. Take the average of the loan outstanding at 6 April at beginning of the year and 5 April at the end of the year (or at the dates the loan was made or discharged, or if the employee died).
  2. Multiply that figure by the number of whole months (a month begins on the sixth day of each calendar month) during which the loan was outstanding in that year and divide by twelve.
  3. Multiply the result by the official rate of interest in force, or if the rate changed, the average rate (on a daily basis), for the period during which the loan was outstanding during the year.
  4. Deduct the interest paid, if any, by the employee/director to the company to give the amount chargeable to tax.

The alternative method may be imposed by HMRC or may be elected by the employee. This alternative method uses the daily value of the loan and the official rate of interest for those dates.

The official rate of interest is 3.25% for 2014/15.

Exemptions exist for:

  • lower-paid employees who are not subject to this charge. These are employees (not directors) who earn less than £8,500 a year
  • a full-time working director with no material interest in the company who earns less than £8,500 a year
  • a director of a charity or non-profit making concern who earns less than £8,500 a year
  • a loan which at no time in the tax year exceeded £10,000 for the year ended 5 April 2015
  • a loan on ‘ordinary commercial terms’.

Article extracted from ACCA “In Practice” Newsletter