HMRC has revised the guidance on director’s loans due to the UK GAAP change to accounting rules affecting reporting as taxing debt will now be largely driven by FRS 102 requirements for financial instruments
In the director’s loan toolkit, HMRC states that the prescribed accounting treatment depends on which accounting framework has been adopted by an entity when making loans to/from directors/employees where there is no explicit interest rate or if the rate is not charged at market rate.
The document says where an entity applies either FRS 102 Financial Reporting Standard applicable in the UK and Ireland or FRS 102 Section 1A Small Entities then such loans are required to be accounted for as if they were a loan with a market rate of interest.
Where a company applies FRS 105 Financial Reporting Standard applicable to the Micro-entities Regime, there is no requirement to account for such loans as if they were a loan with a market rate of interest. Instead such loans would initially be recorded at the amount borrowed/advanced. The choice of accounting treatment does not affect the amount chargeable.
Section 455 Corporation Tax Act 2010 is a key anti-avoidance weapon for owner-managed companies. Without it, owner managers could easily avoid a tax charge by arranging for ‘their’ company to lend them funds (as opposed to paying a ‘taxable’ bonus or dividend).
The HMRC guidance on director’s loans is here.