Tax treatment of inter-company loans?

[dmorris99]

Hi there,

Can anybody give me some advice on this matter:

1. Company A receives £X, as part of its normal line of business.

2. Company A loans Company B £X, so entering into a new line of business (the lending of money for profit.)

I understand that Company A will suffer corporation tax on all interest payments received from Company B. However, I am unclear as to whether the initial payment of the loan capital qualifies as a tax-deductible expense for Company A. Can anybody please clarify this for me?

I have been informed that the initial loan payment is a tax-deductible expense for Company A, and it also does not qualify as taxable income for Company B. Where I am confused, is that this seems to totally remove the need to pay corporation tax on the loan principle, £X. Or perhaps the corporation tax on the principle would be due when the principle was repaid, either in full or in part?

Any advice is very much appreciated.

D.

[Richy1972]

Company A will pay corporation tax on the interest it receives on the loan. Company B will deduct the interest paid in its accounts thus reducing its corporation tax liablity. The loan should be charged at a commercial rate of interest.

[dmorris99]

Hi Richy,

I understand both of your points re. interest and I also understand that the loan must be at commercial rates...

However, my question was with regard to corporation tax on the PRINCIPLE of the loan. E.g.;

I receive £1000 (+VAT) from my regular line of business. I set aside the VAT, and I take the ex-VAT amount, £1000, and I loan it (ALL) to Company B (new line of business for me, loaning cash)

Now, at the end of my financial year (assuming I do no other business, and assuming that I receive no interest payments nor repayments on the loan, to keep things simple), what is my taxable profit? Is it £1000, or is it zero (i.e. the £1000 that I lent out is an EXPENSE incurred as part of my new line of business, and offsetable against my turnover)?

I've been told that IT IS an allowable expense, i.e. that the loan principle that I lend out is offsetable against my turnover, in arriving at a taxable profit figure for my company. I've also been told that from Company B's point of view, the £1000 that it receives (borrows) does NOT count towards its taxable profit (it's borrowed money after all.)

Both of those statements kind of make intuitive sense to me, ***BUT*** at the same time, I can't understand how that is actually allowed: because that taxable £1000 profit has just "disappeared"! Surely, at some point corp. tax must be paid on that £1000 that I loaned?

Any ideas?!

Thanks,
D.

[Richy1972]

I dont know who told you that the loan was an a deductable expense against your turnover. If that was the case Companies would loan money on the last day of thier financial year to receive tax relief and then have it paid back on the first day of their next financial year. The actual loan is not deductable,(it is only a movement on both companies balance sheet) the only areas of the loan that affect the corporation tax are the interest elements which i mentioned in my previous post.

[dmorris99]

Ok, thanks for your input. I think that I got hold of the wrong end of the stick here, as opposed to my advice being bad.

I guess I thought that maybe the corp. tax on the principle might become payable as the principle itself was repaid to me, but I guess not.

Thanks,
D.

[TheGrinch]

I am looking to do something similar and I wondered why an intercompany loan should have to be subject to interest at commercial rates. I am sole director of two companies, wishing to make a loan from one to the other in order to purchase an asset, and I had envisaged an interest free loan would be ok. Maybe someone could advise whether or not this is the case? Also is there any rule on how repayment of the loan should be structured and what if any would be the maximum amount allowed, assuming the loan was made from distributable profits after corporation tax has been paid? Any advice much appreciated.