Kirkpatrick & Hopes - Succession Planning Accountants

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Tax implications of new accounting rules

The calculation of profits for tax purposes is based on the profits of the business computed in accordance with Generally Accepted Accounting Principles. The introduction of a new accounting standard (FRS 102) means that some of the figures in your accounts may need to be restated and these changes may have tax implications. We will discuss these changes with you and seek to minimise the tax impact where possible.

The changes that relate to interest free loans  
One of the areas where there may be a change in your company’s accounts is where you have received or made a loan that is interest free or at less than market rates. Unless the loan is repayable on demand the new accounting rules require the loan to be recorded in the accounts on an amortised cost basis.  For example this means that a £20,000 interest free loan repayable in two years time would be valued at £18,141 if the market rate of interest is 5%.

This method recognizes that £20,000 today is worth more than £20,000 in two years time. If your company is borrowing the £20,000 then there would be finance expenses of £907 in year 1 and £952 in year 2 reflecting the initial £1,859 discount. These finance expenses would be deductible for corporation tax provided the lender is also charged to UK corporation tax on the interest. But if the interest free loan was from an individual such as a director there would be no tax deduction, a point clarified in the latest Finance Bill

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