In our latest tax tips email for accountants we said:
This week we examine the available information about MTD for VAT, and which businesses will be affected. HMRC has made some changes to the procedure for opting to tax a property for VAT purposes, which we describe below. Finally, we have good news about accounting for directors’ loans, and a reminder of the tax treatment.
Below is just an extract from that email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)
Loans to and from directors in close companies can cause all sorts of tax problems, but since the accounting standard FRS 102 came into effect for accounting periods starting on and after 1 January 2016, such loans can cause accounting problems as well.
The good news is that the Financial Reporting Council has proposed an amendment to FRS 102 (FRED 67) to apply to loans to a small company from a director/shareholder or a close family member of that director/shareholder. In such cases the value of the loan should be measured at transaction price rather than at net present value, which would be calculated using a market rate of interest. This amendment will have retrospective effect from 1 January 2016. In essence the amended FRS 102 treatment means those loans are accounted for as they were traditionally, at historical cost.
Remember where the director lends a significant sum to the company, those funds need to be used for a trading purpose, before the company can claim a tax deduction for the interest paid. There is a danger that if the cash sits in the company’s bank account doing little, company’s activities may be regarded as making investments rather than trading, and its shares will not qualify for entrepreneurs’ relief on disposal.