Business Loan - The Book-keepers Forum (UK)

jillemily · Veteran Member

Business Loan

Sue T · Veteran Member

Hi Jill

You would put the vehicle purchase cost as an asset, and you can only claim the loan interest paid which relates to the vehicle back as an expense.

Sue

-- Edited by Sue T on Sunday 30th of May 2010 04:32:20 PM

Shamus · Forum Moderator & Expert

Hi Jill,

no, that's not how it's treated.

it was a business loan and the business will repay the loan in it's entirety.

Anything taken from the loan for personal use is drawings.

Think of it this way. The company has taken out a loan which increases the companies capital.

The director uses some of the companies capital for personal use so put to directors drawings.

The loan must still be repaid by the company.

One proviso on this is that the loan was no doubt taken out for a reason which had a valid business case.

If the business case is not fulfilled and the loan is used for other purposes then the provider of finance could regard this as misrepresentation by the company and the loan could be called in becoming repayable immediately in it's entirety.

If this were the case then could the companies books still be produced on a going concern basis?

That's a situation more common with overdrafts and cases where the collateral against which a loan is guaranteed reduces below the level of the loan but if a bank thinks that it's been taken for a ride depending on the wording of the contract they may rescind the loan agreement even if all of the payments against it are up to date.

-- Edited by Shamus on Sunday 30th of May 2010 04:44:51 PM

Shamus · Forum Moderator & Expert

Hi Sue,

sorry, sounds as though I was answering your answer but I was actually answering Jill's.

However, the case is that the loan was taken out by the company so all of the interest is allowable regardless as to how the capital is used.

Sue T · Veteran Member

Hi Shaun

Well I am totally shocked that the interest can all be claimed by the business for a loan which is not used entirely for the purpose of the business. Think I'll go get me a business loan for a trip to the Bahamas! biggrin

Sue

-- Edited by Sue T on Sunday 30th of May 2010 04:59:31 PM

-- Edited by Sue T on Sunday 30th of May 2010 05:04:28 PM

Sue T · Veteran Member

Jill was the vehicle a commercial vehicle or a car, as a matter of interest?

-- Edited by Sue T on Sunday 30th of May 2010 05:15:25 PM

-- Edited by Sue T on Sunday 30th of May 2010 05:16:31 PM

Shamus · Forum Moderator & Expert

Ah but the key is that the loan is used for the business regardless as to what the business does with it.

The money in the company is not ring fenced. One is unlikely to be able to say well this money came from the loan and this money is existing capital.

Basically, if the bank let the company have it then it's a company loan and the company repays it. However, every penny of capital must be accounted for regardless of where it came from or went to.

I always find buy to lets a strange one.

Imagine that you inherit, say £100k.

Now what you could do would be to invest that in paying off your mortgage which sounds like a sensible thing to do.

However, if you started a buy to let business you could buy a house to let out using the £100k then remortgage it to the hilt (probably for more than £100k).

The money raised could then all be paid into your own mortgage perhaps paying your house off and the buy to let is mortgaged to the hilt.

In this way, if you think about it logically you are now (because this is a business loan) receiving tax relief on your mortgage payments. Your own home is now not at risk if you cannot keep up the repayments and capital gains is only on the profit above what you paid for the rental property. also, it serves as a nice little retirement nest egg as someone else pays off the mortgage

-- Edited by Shamus on Sunday 30th of May 2010 05:17:49 PM

Sue T · Veteran Member

Shaun - from Business Link

Interest paid on loans taken out by businesses is a deductible expense in arriving at your final profit or loss figure on which your tax bill is calculated. The loan interest can only be deducted from profits if the loan is exclusively for a business purpose or a property letting if it is part of your business premises.

I am confused now.

Sue

-- Edited by Sue T on Sunday 30th of May 2010 05:21:54 PM

-- Edited by Sue T on Sunday 30th of May 2010 05:25:45 PM

Shamus · Forum Moderator & Expert

But the loan would have been taken out exclusively for business purposes.

However, this now comes back to my point in my original reply that if the finance provider was misled by the loan application and the funds were in fact for the business owner then the bank may rescind the loan if they see fit.

And this may cause issues with the going concern status of the entity.

Any loan taken out though by a business, for the business is a business loan and the loan interest is allowable.

Ok, think of this situation.

A business owner invests £50k in the business which is invested in fixed assets.

He then loans £100k from the bank

With £50k of the loan he buys more fixed assets

With the other £50k he repays himself his original capital investment.

The company still has £100k worth of fixed assets now all financed by the bank therefore how can one argue that the loan interest is not allowable?

Shamus · Forum Moderator & Expert

Bills going to kick himself that he's missing this debate.

just to clarify one point. When I'm talking about companies I'm talking about limited companies (regardless of size) rather than sole traders who will have more difficulty differentiating themselves from their businesses.

Sue T · Veteran Member

I see where you are coming from Shaun but in the scenario you mention there are actually 100K of fixed assets, albelt some of which were purchased by the owner previously,which have been purchased to the value of the loan, but in Jill's scenario the money has not been fully spent on a capital expense and therefore surely would not deemed to be a loan for full business purposes. Goodness you give a girl a hard time Shaun.LOL biggrin

Sue

-- Edited by Sue T on Sunday 30th of May 2010 05:47:45 PM

Shamus · Forum Moderator & Expert

Which again comes back to the company loan under false pretenses.

In order for the director to have taken the capital out of the company there should be sufficient capital in the company.

Taking out a loan will have introduced capital but it will also have created a liability to repay that loan.

Taking money out of the company will reduce the capital but not the liability.

The finance providers will keep an eye on the gearing / liquidity ratio's of the company. Making the withdrawal of capital apparent where the company did not already have sufficient capital reserves to support such a withdrawal.

So, taking the above into account only situations such as the £100k example from my previous message would be acceptable. Using company funds to support one's own lifestyle unless by legitimate payment would not be considered legitimate use of company funds.

There are just too many company directors think that their companies are their own private piggy banks. Upset the wrong finance provider with that sort of behavior and they quickly find out how wrong they are!

Wella · Expert

Note to self "Stop kicking!!"

It's funny, I notice that whenever the word business is mentioned, I think soletrader but you think Ltd company Shaun.

Good debate, pity I missed it!

Have a good evening

Shamus · Forum Moderator & Expert

so true on that ltd co. / sole trader line of thought. I'd never really thought about it before but you're right... Damn elitist bankers!

this debate had your input written all over it. Sorry you missed it matey,

Hope that you have a good one too,

talk in a bit,

Shaun.

jillemily · Veteran Member

I didn't realise my question would start such a debate. In my scenario it is a sole trader that took out the business loan and with a proportion of the business loan he bought a van solely for business use and also had it sign written.

So are you saying that all the loans repayments and interest each year for the whole loan amount can be counted as expenses? hmm

Shamus · Forum Moderator & Expert

Hi Jill,

Bill's completely correct. I just assume limited where as he assumes sole trader.

I was coming from the angle of it being a limited company.

For a sole trader where the segregation between the proprietor and the business is less defined then the situation is different.

Your client will have taken out the loan for business purposes but as per the quote from the business link website only that proportion of the loan used for business purposes can be deemed legitimate for interest calculation purposes.

So basically your client will end up paying interest on the drawings. Really makes one wonder why anyone would ever be self employed when they could be limited doesn't it!

I can certainly understand why as a rule of thumb if you go to an accountants the first thing that they do is try and get you incorporated.

Anyway, in short, for sole traders take the more complex proportional route, for limited companies take the 100% through the company route.

What a sad end to a great little debate.

Talk later,

Shaun.

Sue T · Veteran Member

Whew glad thats sorted.

Sue

-- Edited by Sue T on Monday 31st of May 2010 09:27:05 AM

-- Edited by Sue T on Monday 31st of May 2010 09:36:44 AM

jillemily · Veteran Member

Hi Sue

Sorry I still need some clarification. What about the loan repayments every month do they get treated as an expense too aswell as the interest? (only the relevant proportion I am talking about now!)

Also as I am putting the van as an asset can I claim that expense as a capital allowance along with tools bought for the business on the SA?

Kind Regards
Jill

Sue T · Veteran Member

Hi Jill

No the repayments are not an allowable expense only the interest apportioned to the Van.
Yes the Van expense is a capital allowance along with tools and claimed in the self employment pages of the tax return.

Entries would be: CRT Loan a/c with cost of van and interest, DBT Plant & Machinery for cost of Van, Dbt Loan interest expenses with interest.

Sue

-- Edited by Sue T on Monday 31st of May 2010 09:42:05 AM

-- Edited by Sue T on Monday 31st of May 2010 09:43:11 AM

-- Edited by Sue T on Monday 31st of May 2010 09:55:11 AM

-- Edited by Sue T on Monday 31st of May 2010 09:58:32 AM

jillemily · Veteran Member

Thank you very much all clear now. smile

As the van is an asset can I claim all of the fuel along with van expenses as expenses or do I still need to allow a percentage for private use?

Sue T · Veteran Member

Jill forgot to add that every month you would credit the Bank a/c with the Loan repayment and debit the loan account with the Loan repayment amount.

You can only claim the actual expenses related to business use, so if your client uses the van 60% for business and 40% private you can only claim 60% of the fuel expense.

Sue

-- Edited by Sue T on Monday 31st of May 2010 10:13:05 AM

-- Edited by Sue T on Monday 31st of May 2010 10:13:28 AM