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Does an employee loan always need reporting to HMRC?

Newsletter issue - February 2022

Employee loans are an area where businesses often get confused. The first thing many owners will think of is the temporary corporation tax charge under s. 455. However, that only applies if the loanee is a participator of a close company. It doesn't apply to regular employees - even directors - unless they also own/control at least 5% of the company's share capital.

However, that isn't the end of the tax issues. Employee loans can be a taxable benefit in kind (BIK) that need reporting on form P11D if they are made on beneficial terms. Broadly, a loan to an employee will be a BIK if:

• the balance exceeds £10,000 at any point during the tax year; and
• the employee isn't required to pay interest at a rate at least equal to HMRC's official rate of interest (currently 2%).

Note that the first bullet about the balance exceeding £10,000 excludes any interest charged, unless it is added to the loan balance instead of being physically paid by the employee.

As the current official rate of interest is relatively low, a simple (and cheap) method of avoiding a BIK, and therefore a Class 1A liability, would be to add an interest charge at the end of the tax year, and have the employee pay this to the employer before 6 July.

However, before doing this it is worth checking to see if the loan is of a type that isn't a taxable BIK.

A BIK won't arise on a loan that is made by an employer that is an individual, rather than a company, and the employee is a member of their family or household. This exception doesn't apply to company employers - even if there is only one director shareholder.

If the employer's business includes making loans to the general public, no BIK will arise as long as the employee loan is made on similar terms.

Finally, certain loans are "qualifying" if the interest paid on them attracts relief (or would attract relief if interest were charged). Information on this type of loan can be found at EIM26136, and includes, for example, loans used to purchase an interest in a partnership, close company, etc.