Hi. Im new to the forum and am hoping someone can help. Im helping my aunty prepare her accounts for her company, shes preparing all the statements and im just helping out with some of the paperwork. my question is:
my uncle has loaned my aunty 30, 000 for the business which she hasnt used. she was planning on geting some work done on the office which she has now postponed. She has lent 10,000 of the money to a frien. Which hasnt been repaid at the year end. Is she correct in showing 30,000 as other creditor and 10,000 as other debtor? As the loan she receieved was for her business i think she is rite to include it as a creditor, and the loan to her friend as a debtor. Both loans are interest free. Also as the loan given hasnt come out of profit, as there was no profit, there are no tax implications. Is this correct??
She seems to think it is as she has been advised to record it as such, however im unsure so im asking for your opinion
I started to answer this one last night but backed off.
Marks answer to the question as always is the correct one but I had a more fundamental thoughts that stopped me from posting in that. where is the business and what right does the aunt have to loan out the companies money?
The scenario is that A loans money to B who loans money to C but you state that there is no profit and the impression that I get is that the business is not trading.
The definition of a business per IFRS3 is "an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return".
So as I say, where is the business?
The Aunt and Uncle are related parties (I am assuming husband and wife?) was this in fact the aunts own money that she invested in her business but put through her husband? As such that would be an increase in the owners capital or dumped in the DLA (so could be offset against existing borrowing within the DLA) rather than a straight loan arrangement as is being indicated.
The aunt has taken it upon herself to loan money that belongs to the company to a friend without charging interest. I need to emphasise that when the money was loaned to the company it became as asset (and equal liability) of the company. It is no longer the aunts to treat as her own even if she owns the company.
Do the companies articles permit the company to make interest free loans (or any loans for that matter)?
Does the company have a credit licence?
Was making the loan in the best interests of the company?
Are there any other shareholders who may object to this?
HMRC would likely look upon the loan as a withdrawal by the director and personal loan to the friend rather than a loan by the company as there is no commercial merit behind the transaction.
As such the director would be responsible for paying the tax and NI on the withdrawal (it cannot be declared as a dividend as there is no profit and dividends can only be taken from profit).
As you can see, I thought of a lot of questions when composing the response and felt it better not to reply but as a direct response to the question asked was given I thought best to relay my thoughts on the extended scenario.
At the end of the day the Aunt has a fiduciary duty of care to act in the best interests of the company (The same duty that a parent has for a child). She does not seem to be properly fulfiling that duty if she is loaning money that belongs to the company to freinds.
I have probably over thought the whole scenario.
kind regards,
Shaun.
P.S.1 I cannot remember the facts but I'm sure that I read somewhere that if the primary activities of the business were loaning money (as could be argued here as there is no profit from any other source) then all income would be taxed at the higher rate (not that there actually is any income) regardless as to the level of turnover.... Now wonder how to google that question without the results coming back with a million and one payday loan company ad's!
P.S.2 edited for grammar and spelling rather than content.
P.S.3 there is no assumption of money laundering in my answer due to the related party nature of the initial transaction but be aware that in these sort of arrangements such is normally something that need to be watched for. You need to know the source of money loaned to a business. (thasts more for others reading this than the original poster).
-- Edited by Shamus on Thursday 21st of March 2013 10:28:46 AM
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
All comes down to who the uncle gave the money too and who gave the loan to the friend.
...
The BiK arises when Uncle lends £30k to Company and the Company lends £10k to Aunty (who then lends it to her friend - I can't envisage any situation where the Company can properly lend directly to the friend). Aunty is receiving the benefit of an interest-free loan which would be taxable.
I agree with your solution, which is what I implied in the first scenario of my my earlier post. Will the audit trail support this, though?
-- Edited by ilsm on Thursday 21st of March 2013 09:03:40 PM
-- Edited by ilsm on Thursday 21st of March 2013 09:07:53 PM
Hi Phil I was going on the line in the posters original post that said "Im helping my aunty prepare her accounts for her company".
It may have been a typo by the poster not realising the importance of the word or it could have been deliberate. I took the use of the word Company rather than business as deliberate which is why I phrased my reply the way that I did.
As you rightly state it would have been a completely different reply for a sole trader as opposed to a company.... Would be a shame now if it wasn't a company after they got the reply that they did, lol.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thank you for the responses. The company is limited with one shareholder, my aunty. The uncle who lent her the money is distant uncle. The person she lent money to is a friends. She sed because the money hasnt been used and her friend needed the money, she lent it and it hasnt been repaid. The company is trading however made a loss and the loan aunty gave was from the loan she received for the company as the company has no money.
Is she ok to go ahead in treating it as debtor? The trading has nothing to do with giving loans or any sort of finance, its just sonething she has done. The accounts havent been submitted yet so if the tretment is wrong she has time to make amendments.
(1) If uncle lent aunty £30,000, then it doesn't matter what aunty did with the money until she paid some or all of it into the Company. It was a private and personal transaction.
However, if uncle lent the money to the Company then -
(2) The £30,000 is clearly a liability owed by the Company to the uncle, andi t must be shown as such.
The £10,000 is a loan by the Company to the aunt, and so should be shown as an asset. Fortunately, directors' loans are no longer illegal.
As the aunt's loan is a director's loan and amounts to £10,000, there should be a shareholder's resolution approving the loan. I note that the aunt is the only shareholder, so that is just a formaility, but one that must be observed.
There are also tax implications: the £10,000 loan to aunty will be a benefit in kind and tax will be due on the official rate of interest. Also, if the loan is still outstanding 9 months after the year end, it will be subject to a tax charge even if the Company is trading at a loss.
There are also tax implications: the £10,000 loan to aunty will be a benefit in kind and tax will be due on the official rate of interest. Also, if the loan is still outstanding 9 months after the year end, it will be subject to a tax charge even if the Company is trading at a loss.
Hope this helps
ilsm
Dont think the above is right. The loan of £10k isnt to the aunty but a friend of the aunty. From the info given friend isnt a shareholder/director or employee so wouldnt be any BIK implications.
All comes down to who the uncle gave the money too and who gave the loan to the friend.
Easiest way to treat would be uncle gave money to aunt who lent the money to the company therefore Cr DLA £30k. Aunt then drew down £10k from the DLA and then gave it personally to the friend. End resut is £20k DLA owed by the Ltd Co to the aunt.
