Chapter 7 – Deductible Payments

Question 1

deductible payments and qualifying interest

Answer 1

Deductible payments – expenditure incurred by a taxpayer in which they receive tax relief, they are deducted from income, usually starting with non-savings income. Most important type of deductible payment is interest paid on qualifying loans. The total amount which can be deducted is the greater of £50,000 or 25% of adjusted total income. This is most likely to be an issue in respect of loss relief.
Qualifying Interest – paid on qualifying loans is deducted as a deductible payment in the tax computation. The payment is made gross and there is no limit on the amount of the loan that qualifies for tax relief.

Question 2

Qualifying interest s390, s392, s396 and 401, s398

Answer 2

S.390 – loans taken out by an employee to purchase plant and machinery for use in their employment qualify for tax relief and interest paid on those loans can be a deductible payment. Only interest paid in the year of the loan and the next three years will qualify for tax relief. The relief does not apply to loans to purchase cars. The item will only qualify for relief if it is used wholly for business purposes.
S.392 – a loan taken out to purchases shares in a close company (company controlled by five or fewer shareholders, you must work for the company or hold more than 5% of shares). Relief is also given where an individual takes out a loan to provide funds for a close company to use in its business. Relief is not given for the interest paid if the individual has made a claim in respect of the shares under the Enterprise Investment Scheme or Social Investment Relief scheme.
S.396 and s401 – a loan taken out to purchases shares in an employee owned company qualifies for relief provided it is an unquoted trading company resident in the UK or an EEA state. A loan to invest in a cooperative also qualifies for relief.
S.398 – a loan taken out to buy into a partnership qualifies for tax relief.