FRS 102 guidance on directors’ loans revised

HMRC have recently updated their online toolkit on directors’ loan accounts to help tax advisers and agents preparing 2015/16 company tax returns. The update reflects the changes to reporting requirements under UK GAAP, as taxing debt will now be largely driven by FRS 102 requirements for financial instruments.

If an entity makes loans to/from directors/employees where there is no explicit interest rate or the interest rate charged is not at a market rate, then the prescribed accounting treatment will depend on which accounting framework the entity has adopted.

Where an entity applies either FRS 102: The Financial Reporting Standard applicable in the UK and Republic of 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: The Financial Reporting Standard applicable to the Micro-entities Regime (FRS 105), 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 under Corporation Tax Act 2010, Section 455. That is charged on the full amount initially borrowed/advanced. Without this piece of anti-avoidance legislation, owner managers could potentially avoid a tax charge by arranging for ‘their’ company to lend them funds (as opposed to paying a ‘taxable’ bonus or dividend).

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