This guidance note considers the accounting rules governing loan relationships and the tax law applicable if a company departs from those rules.
The basic measure of the profits of a company chargeable to corporation tax in the UK is the profit before tax (PBT) figure as reported in its statutory accounts. Consequently, the tax return of a UK company is generally completed by taking the PBT for the financial period as reported for accounting purposes and making adjustments to that figure only to the extent expressly required by UK tax law. The accounting treatment of any transaction is therefore fundamental to its tax treatment. Understanding the basic accounting treatment of an item and its acceptability for tax purposes is a crucial part of preparing a tax computation.
For further information on the rules governing the computation of profits for corporation tax purposes and the required adjustments to accounting profits, see the Adjustment of profits ― overview guidance note.
UK companies are required to follow both commercial law and ‘generally accepted accounting practice’ (GAAP)
Associated companies ― from 1 April 2023Implications of associated companiesFrom 1 April 2023, the rate of corporation tax that a company is subject to depends on the level of its augmented profits. The rate of tax is based on a comparison of the company’s augmented profits against the corporation
Taxation of loan relationshipsThe vast majority of companies will have loan relationships and so will need to consider how they are taxed under the loan relationship rules. There are also specific provisions dealing with relevant non-lending relationships and other deemed loan relationships.
Loans written offCompanies sometimes provide directors, employees or shareholders with low interest or interest-free loans either as part of the reward package or on special occasions to help the individual meet significant expenditure. The employment income implications of these loans are discussed