I am helping out a friend by doing his accounts as he's had a couple of really bad years so I thought it would save him in accountancy fees (and his fees were extortionate given the work involved). I'm not 100% sure of the rules on which types of interest and charges I need to add back in order to calculate his taxable profits. Can anyone help?
I know bank charges on his business current account are allowable.
Years ago when a business account was overdrawn, the interest was not allowable. Is this still the case?
What about charges such as unpaid fees and unauthorised overdraft fees? I'm guessing not but not sure?
He has a business credit card which he used quite a lot and never cleared the balance on a monthly basis. Is this interest allowable?
His overall interest and charges come to over £3k so anything that I can genuinly put through the better for him.
Thanks in advance. I've tried looking at HMRC website but can't find anything. Does anyone have any ideas how I can brush up on my knowledge here?
2. I don't see why it would not be allowable? They are charges incurred as part of a financial agreement between the client and the bank. I don't believe the interest would be considered as 'fines & penalties' by HMRC.
3. Not sure what you mean by 'unpaid fees'. As for overdraft fees, see point 2 above.
4. Yes - the interest is allowable as it is interest paid on money borrowed for business purposes. A credit card is just one of the many means to borrow money.
Hope this helps.
Fabs
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I can only think that as many bank charges relate to the number of transactions, then if there are a lot of drawings entries then it seems to me that the same proportion of the bank charges is not allowable. With the business not doing well, the proportion might be significant.
Obviously he should keep in regular touch with his bank on the options for keeping the interest and charges at a minimum.
The HM Revenue & Customs guidance on interest starts here.
The guidance (BIM45695) states that for a general business bank account the interest should be allowable as long as the owner has a positive capital account. If they don't then that could be evidence that excessive drawings have been taken and the overdraft is being used to finance personal expenditure. If that were the case, then the interest and associated fees for the relevant period would be disallowed.
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Pearce & Co - Chartered Accountant and Chartered Tax Adviser
He hasn't had a positve capital account for a few years now, so I'm assuming that the bank interest should be disallowed.
Also, if he's incurring charges for unpaid direct debits and for exceeding his overdraft, I assume that these should be disallowed for the same reason.
Am I okay to leave the credit card interest as allowed? Or, should it be disallowed for the same reason? i.e. his drawings were high, therefore he had no cash in the bank, therefore he could not repay the business credit card?
He hasn't had a positve capital account for a few years now, so I'm assuming that the bank interest should be disallowed.
You said that he's had a couple of really bad years. If he's making losses, then it may be that only a proportion of the interest and charges needs to be disallowed (as the overdraft may be financing the losses). The HM Revenue & Customs guidance (see '1991') includes an example of this.
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Pearce & Co - Chartered Accountant and Chartered Tax Adviser
To disallow credit card interest, in my opinion, would be the same as to disallow interest on a bank loan. If it was wholly incurred through business costs then it's a business expense and allowable.
