ACCA TX UK Syllabus E. Corporation Tax Liabilities - Loan relationship rules - Notes 12 / 14
The loan relationship rules
Basis of assessment of “Interest Income”
There is an “interest element” in the corporation tax computation for companies.
All interest is received gross for companies and the basis of assessment for interest income is the accruals basis.
Operation of “Interest Income”
Any interest payable or receivable by companies will be deducted from or added to “interest income
For example, if a loan was taken out to purchase an investment property, the interest payable would be deducted from this area, not property income.
However, there is one exception to this rule, that is that any loan taken or received for trading purposes will have its interest payable or receivable adjusted within “Trading profits”.
Otherwise, any non trading loans will be adjusted within “Interest income”.
Summary of similarities and differences between individuals and companies
Particular | Individuals | Companies |
---|---|---|
Gross/Net | Gross and net | Gross |
Accruals | Accruals | Accruals |
Trading/Non trading loans | Deducted from their respective areas | Deducted from Interest income, except for trading loans |
Simple proforma:
Bank and building society interest receivable | x |
Gilt interest receivable | x |
Loan note interest receivable | x |
Repayment interest receivable from HMRC | x |
Less:
Loan arrangement fee | (x) |
Interest payable on loan to buy inv. Prop. | (x) |
Late payment interest on overdue tax | (x) |
Interest surplus/deficit | x/ (x) |
Illustration:
Seeta Ltd. took out a £190,000 loan on 01/07/24 in the year ended 31/03/2025.
The arrangement fee for this loan amounted to £1,400.
The interest on this loan is £7.25% per annum. The loan is used for various activities:
£130,000 to buy an investment property.
£45,000 to repair an office building that is rented out.
£15,000 to fund working capital requirements.
How much of the interest payable will be taken under the Interest income?
Solution:
The year ends 31/03/2025. Therefore 9 months of interest will be payable.
9/12 * (190,000 * 7.25%) = £10,331
Interest Income:
Loan interest to buy an investment property is allowable
Loan interest to repair an investment property is allowable
= (£130,000+£45,000)/£190,000 * £10,331 = £9,515
Trading income:
Loan interest to fund working capital requirements will be treated as a trading expense.
£10,331 - £9,515 = £816