One for the Accountants

[vixpy1]

Loans to Business.

If I loan my company 10K, can the company pay the money back Before paying corporation tax? As I understand it, Corporation tax must be paid on the profits before any company loans can be repayed. Is this right?

Thanks,

Charlie.

[Size Nine Elm]

A loan, and its repayment, comes under assets and liabilities to the company - not under P&L. Your tax is on your profit... sorry.

Otherwise if you loaned the company £10k, you would have to pay tax on the £10k as profit... so in the same way, the repayment is not an expense...

Edited to add: of course, corporate gifts, such as Wing'd Horses of ChavTat, may be tax deductible.

>> Edited by Size Nine Elm on Tuesday 28th December 13:46

[vixpy1]

So if I make 50K and have running costs of 15K, I make a profit of 35K

But I want to pay myself back the 10K loan (not included in the above amount)

So do I pay myself back the loan of 10K, then pay Corporation tax on the remaining 25K, or pay tax on the whole 35K, then pay back the 10K to myself?

Many Thanks,

Charlie.

[Size Nine Elm]

vixpy1 said:

So if I make 50K and have running costs of 15K, I make a profit of 35K But I want to pay myself back the 10K loan (not included in the above amount) So do I pay myself back the loan of 10K, then pay Corporation tax on the remaining 25K, or pay tax on the whole 35K, then pay back the 10K to myself? Many Thanks, Charlie.

You pay tax on the £35k profit.

On the balance sheet - statement of value of the company - you will have £10k liability - the loan - and an amount of cash (£35k less the tax you've paid), say £25k - net value £15k.

If you pay your loan back, your balance sheet will no longer have a liability, but your cash will now be £15k - net value £15k. No profit or loss.

[vixpy1]

Brilliant..

Many Thanks.

[Eric Mc]

Think of the logic.

I loan you £10,000

You pay me back £10,000

You have had no real income (it was only a loan after all) and you have had no real expenditure (you only gave back to me the £10,000 I originally gave you).

If you were going to try and claim back the £10,000 loan repayment as a cost in your company's accounts, wouldn't the Inland Revenue want to tax it as part of the profit when the money was originally loaned to the company.

[vixpy1]

Hi Eric,

I perhaps should said that the loan money was used to purchase equipment at the start up of the company, hence the company having to 'earn' it back to pay me.

The amounts i used are only examples.

Many Thanks,

Charlie.

[Eric Mc]

How the company "raised" the funds to pay you back is irrelevant. It could have simply sold the equipment it bought using the money originally loaned. If it had done so and it hadn't claimed Capital Allowances on the equipment and it sold the equipment for the same amount it originally paid for it, then you and the company would be restored to the original position before the loan was made and the equipment was bought.

However, the company has not sold the equipment and instead generated the funds to pay you back out of its normal trading activities. Those normal trading activities would have been taxed in the normal way - irrespective of the fact that the company chose to repay the loan to you out of the funds raised.



>> Edited by Eric Mc on Tuesday 28th December 19:29

[vixpy1]

Thanks Eric.