Chapter 9 Loan Relationships

Question 1

9.1 Definition

Answer 1

A company has a loan relationship if:
• It owes or is owed money as respects a money debt, and
• That debt arose from a transaction for the lending of money
A money debt is generally one that is settled by the payment of cash

Question 2

9.2 Treatment of Income and Expenses

Answer 2

Remember debits are expenses and credits are income.
Loan relationship income and expenses include the following:
• Interest payable and receivable
• Costs to issue the debt
• Debt collection costs
• Pre-loan and abortive expenses
• Loans written off (impairments or bad debts) – this results in an expense in the company writing the debt off
For tax purposes we follow the accounting treatment, using the accruals basis. Generally we can use the interest income and expenses figures in the P+L account for tax purposes.

Question 3

9.3 Purpose of the Loan relationship

Answer 3

The purpose of a loan relationship determines where in the tax computation the income and expense belongs. If the loan was for trade purposes it would be included in the calculation of trade profits. A loan will have a trade purposes if the funds are used to generate income which is taxed as trade profits, examples include:
• A loan to buy plant and machinery to use in trade
• A bank overdraft to fund the working capital of the business
• A bank lending money to its customers
If the loan relationship arose for non-trade purposes, the income and expenses will be pooled together and included as non-trade loan relationship income or deficit for the period, examples include:
• A loan to buy an investment property or shares
• A company lending money to its employees or customers
• A company receiving interest on positive bank deposits
• Interest on overpaid or underpaid corporation tax