Hello, I have a LTD company. During 2021/2022 I took a short term loan from the company which was repaid a couple of months later. Do I have to pay corporation tax on this if the money was repaid? Thanks in advance.
If the loan was granted at zero interest rate, and you are an employee of the company, the substance of the payment is that of advancement to employees. However, if it was a substantial amount and it was held for a long time and then returned without interest, then you would have to pay tax on the market interest rate at which your company would have earned interest.
As you paid it within a couple of months and the amount was not substantial, I think that no tax would be payable.
Bank credited by the loan amount when granted
Receivables ( loan advancements) debited.
This would have to be reversed when the loan is repaid.
Now imagine the interest rate for a similar loan of same amount and term is 5% per annum and you get 100,000 to be repaid after three month.
Bank credited by 100,000
Receivables debited by 98,760.34
Interest expense 1,239.66. ( this is the interest that the company would not lose if they gave the loan to an external party at 5%.)
after three months
Interest Income Credited 1,239.66
Receivables Debited 1,239.66
And when you repay the loan:
Bank debited by 100,000
Receivables credited 100,000
So the company will have recognised an interest income of 1,239.66 and interest expense of same amount. I speculate that interest expense would not be tax-deductible but the interest income would be taxable.
Remember that sometimes the interest free loan would be given to a director if he lobbies or does sth in return. In that case, the calculations would have to capture the service hidden in the loan.
However, it is better to consult your tax agent to find out more.
Zero interest rate loans are governed by Financial Instruments and remember that substance is important not the form of the transaction.
Cheers,
Behrouz Aftabigilvan
