Chapter 19 Raising finance. Flashcards
1.1 Connected party loans.
Two companies are connected if one is under the control of the other or they are controlled by the same person. If a UK company pays interest to a connected party more than 12 months after the end of the relevant accounting period, tax relief for any amounts is delayed until the period the interest is paid, rather than accrued. The rule applies if the recipient is not subject to UK CT. This includes a company resident in a tax haven and a participator in that company which is close.
If a loan is written off between a company and a connected party no tax relief is available for the write-off of the loan for the lender, but no taxable credit arises for the borrower. This rule also applies to write-offs of trade receivables and impairment losses.
2.1 Foreign exchange
For trading transactions, purchasing from, or making sales to an overseas country is recorded using exchange rates at time of transaction. On settlement will get an exchange gain/loss which is taken to the P+L. Exchange differences on settlement are taxable trading income/allowable trading expense.
Monetary items (bank, loans, receivables and payables) are retranslated at the year end and the gain/loss arising is taken to the P+L. These gains or losses are taxable when included in the P+L. The loan relationship rules should be used to determine whether any gains or losses should be taxable as trading income or NTLR.
Non-monetary items (investments and capital assets) on purchase translate the cost using the exchange rate at that date. These are not retranslated in future years, so no exchange gain/loss is reflected in the P+L. On sale, proceeds converted at the exchange rate at that date. As such any exchange differences are treated as part of the capital profit or loss.
3.1 Leasing
Leases are either categorised as either finance leases (lease transfer substantially all risks and rewards of ownership to the lessee) or operating leases (lessor retains substantially all risks and rewards of ownership).
On a finance lease, for accounting purposes the transaction is recognised as a financial asset, with interest and rental income recorded to the P+L. for tax purposes the lessor:
- Is taxed on rental income only (not interest income). Therefore, any interest income included with the P+L should be deducted.
- Can claim capital allowances for the asset.
On an operating lease, for accounting purposes in the accounts of the lessor, the asset is capitalised, depreciation claimed, and rental received is recognised as income. For tax purposes, the lessor is treated as if they own the asset meaning they:
- Are taxed on rental income.
- Add back any depreciation charged.
- Can claim capital allowances.
3.2 Treatment of all leases for the lessee
The lessee will treat both finance leases and operating leases in the same way. They have obtained a right-of-use asset meaning they have the right to use it over the life of the lease.
Rental costs: for accounting purposes, the asset will be capitalised at the present value of the lease payments. Depreciation/amortisation and interest charges are recorded in the P+L. The tax treatment follows the accounting treatment meaning no adjustments are required for tax purposes in respect of the interest or amortisation/depreciation of the lease payments.
Other costs: lessee may have also capitalised the lease premium and any transaction costs incurred in purchasing the lease. For tax purposes any amortisation or depreciation of these is disallowed. However, in the exam you should assume that any figures provided for depreciation are fully allowable for tax purposes.
Rental of cars: if the business leases a car with emissions greater than 50g/km, 15% of the lease costs are disallowed. If the lease was entered into prior to April 2021 this applies to cars with emissions greater than 110g/km. if the car’s emissions do not exceed this figure the full rental cost is allowable. If dealing with an unincorporated business a further disallowance must be made in respect of any private use of the asset.
