Income Tax (Earnings and Pensions) Act 2003 (c. 1)

Part 3 Employment income: earnings and benefits etc. treated as earnings

Chapter 7 Taxable benefits: loans

Calculation of amount of interest at official rate

181 The official rate of interest

(1) “The official rate of interest” for the purposes of this Chapter means the rate applicable under section 178 of FA 1989 (general power of Treasury to specify rates of interest).

(2) Regulations under that section may make different provision in relation to a loan if—

(a) it was made in the currency of a country or territory outside the United Kingdom, and

(b) the employee normally lives in that country or territory, and has actually lived there at some time in the period of 6 years ending with the tax year in question.

(3) Subsection (2) does not affect the general power under section 178(3) of FA 1989 to make different provision for different purposes.

182 Normal method of calculation: averaging

The normal method of calculating for the purposes of this Chapter the amount of interest that would be payable on a loan for a tax year at the official rate is as follows.

• Step 1

  Calculate the average amount of the loan outstanding during the tax year—

  1.

  Find the maximum amount of the loan outstanding on 5th April preceding the tax year or, if the loan was made in the tax year, on the date it was made.

  2.

  Find the maximum amount outstanding on 5th April of the tax year or, if the loan was discharged in the tax year, on the date of discharge.

  3.

  Add these amounts together and divide the result by 2.

• Step 2

  If the official rate of interest changed during the period in the tax year when the loan was outstanding, calculate the average official rate of interest for that period as follows—

  1.

  Multiply each official rate of interest in force during the period by the number of days when it is in force.

  2.

  Add these products together.

  3.

  Divide the result by the number of days in the period.

• Step 3

  Calculate the amount of interest that would be payable on the loan for the tax year at the official rate as follows—

  

  where—

  • A is the average amount of the loan outstanding during the tax year obtained from step 1,

  • I is the official rate of interest in force during the period in the tax year when the loan was outstanding or, if the official rate changed, the average official rate of interest obtained from step 2, and

  • M is the number of whole months during which the loan was outstanding in the year.

  For this purpose a month begins on the sixth day of the calendar month.

183 Alternative method of calculation

(1) The alternative method of calculating for the purposes of this Chapter the amount of interest that would be payable on a loan for a tax year at the official rate applies for a tax year—

(a) if the Inland Revenue so require, by notice to the employee, or

(b) if the employee so elects, by notice to the Inland Revenue.

(2) Notice may be given on or before the first anniversary of the normal self-assessment filing date for the tax year in relation to which the question arises whether the loan is a taxable cheap loan.

(3) The alternative method is as follows—

• Step 1

  Find for each day in the tax year in question the maximum amount of the loan outstanding on that day and multiply it by the official rate of interest in force on that day.

• Step 2

  Add together each of the amounts obtained under step 1.

• Step 3

  Divide the result by the number of days in the tax year.

(4) Where in any tax year the cash equivalent of the benefit of the same taxable cheap loan is to be treated as earnings of two or more employees then, for the purposes of determining the cash equivalent of the benefit of the loan, the alternative method applies if—

(a) the notice under subsection (1)(a) is given to all those employees, or

(b) the notice under subsection (1)(b) is given by all those employees.