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Income Tax (Earnings and Pensions) Bill


Income Tax (Earnings and Pensions) Bill
Part 3 — Employment income: earnings and benefits etc. treated as earnings
Chapter 7 — Taxable benefits: loans

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     (2)    which are taxable cheap loans are outstanding in the year, the aggregate of the

amount outstanding on them) does not exceed £5,000.

     (3)    The £5,000 threshold for non-qualifying loans is not exceeded if at all times in

the year the amount outstanding on the loan (or if two or more employment-

related loans which are non-qualifying loans are outstanding in the year, the

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aggregate of the amounts outstanding on them) does not exceed £5,000.

     (4)    In this section a “non-qualifying loan” means a taxable cheap loan which is not

a qualifying loan.

     (5)    For the purposes of this section a loan is a “qualifying loan” in relation to a

particular tax year if, assuming interest is paid on the loan for that year

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(whether or not it is in fact paid), the whole or part of that interest—

           (a)           is eligible for relief under section 353 of ICTA (general provision for

relief for payments of interest, excluding MIRAS),

           (b)           would be eligible for relief under that section but for the fact that it is a

payment of relevant loan interest to which section 369 of ICTA applies

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(mortgage interest payable under deduction of tax),

           (c)           is deductible in computing the amount of the profits to be charged

under Case I or II of Schedule D in respect of a trade, profession or

vocation carried on by the person to whom the loan is made, or

           (d)           is deductible in computing the amount of the profits to be charged

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under Schedule A in respect of a Schedule A business carried on by that

person.

Calculation of amount of interest at official rate

 181   The official rate of interest

     (1)    “The official rate of interest” for the purposes of this Chapter means the rate

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applicable under section 178 of FA 1989 (general power of Treasury to specify

rates of interest).

     (2)    Regulations under that section may make different provision in relation to a

loan if—

           (a)           it was made in the currency of a country or territory outside the United

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Kingdom, and

           (b)           the employee normally lives in that country or territory, and has

actually lived there at some time in the period of 6 years ending with

the tax year in question.

     (3)    Subsection (2) does not affect the general power under section 178(3) of FA

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1989 to make different provision for different purposes.

 182   Normal method of calculation: averaging

The normal method of calculating for the purposes of this Chapter the amount

of interest that would be payable on a loan for a tax year at the official rate is as

follows.

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Step 1

            Calculate the average amount of the loan outstanding during the tax year—

 

 

Income Tax (Earnings and Pensions) Bill
Part 3 — Employment income: earnings and benefits etc. treated as earnings
Chapter 7 — Taxable benefits: loans

    88

 

            1. Find the maximum amount of the loan outstanding on the 5th April

preceding the tax year or, if the loan was made in the tax year, on the date it

was made.

            2. Find the maximum amount outstanding on 5th April of the tax year or, if the

loan was discharged in the tax year, on the date of discharge.

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            3. Add these amounts together and divide the result by 2.

Step 2

            If the official rate of interest changed during the period in the tax year when the

loan was outstanding, calculate the average official rate of interest for that

period as follows—

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            1. Multiply each official rate of interest in force during the period by the

number of days when it is in force.

            2. Add these products together.

            3. Divide the result by the number of days in the period.

Step 3

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            Calculate the amount of interest that would be payable on the loan for the tax

year at the official rate as follows—equation: cross[char[A],cross[char[I],over[char[M],num[12.00000000,"12"]]]]

            where—

                      A is the average amount of the loan outstanding during the tax year

obtained from step 1,

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                      I is the official rate of interest in force during the period in the tax year

when the loan was outstanding or, if the official rate changed, the

average official rate of interest obtained from step 2, and

                      M is the number of whole months during which the loan was outstanding

in the year.

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            For this purpose a month begins on the sixth day of the calendar month.

 183   Alternative method of calculation

     (1)    The alternative method of calculating for the purposes of this Chapter the

amount of interest that would be payable on a loan for a tax year at the official

rate applies for a tax year—

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           (a)           if the Inland Revenue so require, by notice to the employee, or

           (b)           if the employee so elects, by notice to the Inland Revenue.

     (2)    Notice may be given on or before the first anniversary of the normal self-

assessment filing date for the tax year in relation to which the question arises

whether the loan is a taxable cheap loan.

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     (3)    The alternative method is as follows—

Step 1

            Find for each day in the tax year in question the maximum amount of the loan

outstanding on that day and multiply it by the official rate of interest in force

on that day.

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Step 2

            Add together each of the amounts obtained under step 1.

 

 

Income Tax (Earnings and Pensions) Bill
Part 3 — Employment income: earnings and benefits etc. treated as earnings
Chapter 7 — Taxable benefits: loans

    89

 

Step 3

            Divide the result by the number of days in the tax year.

     (4)    Where in any tax year the cash equivalent of the benefit of the same taxable

cheap loan is to be treated as earnings of two or more employees then, for the

purposes of determining the cash equivalent of the benefit of the loan, the

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alternative method applies if—

           (a)           the notice under subsection (1)(a) is given to all those employees, or

           (b)           the notice under subsection (1)(b) is given by all those employees.

Supplementary provisions relating to taxable cheap loans

 184   Interest treated as paid

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     (1)    This section applies where the cash equivalent of the benefit of a taxable cheap

loan is treated as earnings from an employee’s employment for a tax year

under section 175(1).

     (2)    The employee is to be treated for the purposes of the Tax Acts as having paid

interest on the loan in that year equal to the cash equivalent.

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     (3)    But the employee is not to be treated as having paid that interest for the

purposes of this Chapter or of any of the other Chapters of this Part listed in

section 216(4) (provisions of the benefits code which do not apply to lower-

paid employment).

     (4)    The interest is to be treated—

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           (a)           as accruing during the period in the tax year during which the

employee holds the employment and the loan is outstanding, and

           (b)           as paid by the employee at the end of the period.

     (5)    The interest is not to be treated—

           (a)           as income of the person making the loan, or

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           (b)           as relevant loan interest to which section 369 of ICTA applies (mortgage

interest payable under deduction of tax).

 185   Apportionment of cash equivalent in case of joint loan etc.

Where in any tax year the cash equivalent of the benefit of the same taxable

cheap loan is to be treated as earnings of two or more employees—

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           (a)           the cash equivalent of the benefit of the loan (determined in accordance

with the provisions of this Chapter) is to be apportioned between them

in a just and reasonable manner, and

           (b)           the portion allocated to each employee is to be treated as the cash

equivalent of the benefit of the loan so far as that employee is

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concerned.

 186   Replacement loans

     (1)    This section applies where an employment-related loan (“the original loan”) is

replaced, directly or indirectly, by—

           (a)           a further employment-related loan, or

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Income Tax (Earnings and Pensions) Bill
Part 3 — Employment income: earnings and benefits etc. treated as earnings
Chapter 7 — Taxable benefits: loans

    90

 

           (b)           a loan which is not an employment-related loan but which in turn is, in

the same tax year or within 40 days after the end of the tax year,

replaced, directly or indirectly, by a further employment-related loan.

     (2)    In such a case, for the purposes of calculating the cash equivalent of the benefit

of the original loan under section 175(3), section 182 (normal method of

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calculating interest at the official rate) applies as if the replacement loan, or

each of the replacement loans, were the same loan as the original loan.

     (3)    Where section 182 is applied as modified by subsection (2) then for the

purposes of section 175(3)(b) the amount of interest actually paid on the loan

for the tax year in question is the total of—

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           (a)           the amount of interest actually paid on the original loan for that year,

and

           (b)           the amount of interest actually paid on the replacement loan or on each

of the replacement loans for that year.

     (4)    In this section a “further employment-related loan” means a loan which is an

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employment-related loan made in relation to—

           (a)           the same or other employment with the person who is the employer in

relation to the original loan, or

           (b)           employment with a person who is connected with that employer.

 187   Aggregation of loans by close company to director

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     (1)    This section applies where, in relation to any tax year, there are employment-

related loans between the same lender and borrower which are aggregable

with each other.

     (2)    The lender may elect for aggregation to apply for that tax year in the case of the

borrower.

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     (3)    The effect of the election is that all the aggregable loans are to be treated as a

single loan for the purposes of—

                    section 175 (benefit of taxable cheap loan treated as earnings),

                    the provisions of this Chapter relating to the calculation of the cash

equivalent of the benefit of a taxable cheap loan, and

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                    section 184 (interest treated as paid).

     (4)    For this purpose loans are aggregable for any tax year if they are made in the

same currency and all the following conditions are met in relation to each of

them—

           (a)           there is a time in the tax year when—

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                  (i)                 the loan is outstanding,

                  (ii)                the lender is a close company, and

                  (iii)               the borrower is a director of that company;

           (b)           at all times in the tax year the rate of interest on the loan is less than the

official rate applying at that time;

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           (c)           the loan is not a qualifying loan within the meaning of section 180 (see

section 180(5)).

     (5)    An election under this section must be made by the lender in a notice given—

           (a)           to the Inland Revenue, and

           (b)           before 7th July after the end of the tax year to which the election relates.

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