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Finance Act 1976

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Section 66.

SCHEDULE 8Taxation of Benefit From Loans Obtained by Reason of Employment

PART IMeaning of " Obtained by Reason of Employment "

1(1)The benefit of a loan is obtained by reason of a person's employment if it was made by his employer.

(2)But this does not apply to a loan made by the employer, being an individual, and shown to have been made in the normal course of his domestic, family or personal relationships.

2That benefit is so obtained if the loan was made by a company—

(a)over which the employer had control,

(b)by which the employer (being a company) was controlled, or

(c)which was controlled by a person by whom the employer (being a company) was controlled.

3That benefit is so obtained if—

(a)the employer was or had control over, or was controlled by, a close company, and

(b)the loan was made by a person having a material interest in the close company or, the close company being controlled by another company, in that other company.

4In this Part of this Schedule—

(a)references to a loan being made by any person include references to his assuming the rights and liabilities of the person who originally made the loan and to his arranging, guaranteeing or in any way facilitating the continuation of a loan already in existence;

(b)" employer " includes a prospective employer ; and

(c)" company ", except as part of the expression " close company ", includes a partnership.

PART IICalculation of Cash Equivalent of Loan Benefit

General

5(1)The cash equivalent for any year of the benefit obtained from a loan is—

(a)the amount of interest (calculated in accordance with paragraph 6 or 7 below) which would have been payable for that year had interest at the official rate been payable on the loan ; less

(b)the amount of interest actually paid on the loan for that year.

(2)Where an assessment for any year in respect of a loan has been made or determined on the footing that the whole or part of the interest payable on the loan for that year was not in fact paid, but it is subsequently paid, then, on a claim in that behalf, the cash equivalent for that year shall be recalculated so as to take that payment into account and the assessment shall be adjusted accordingly.

(3)All the loans between the same lender and borrower for which a cash equivalent falls to be ascertained and which are outstanding at any time, as to any amount, in any year are to be treated for the purposes of this Schedule as a single loan.

Normal method of calculation (averaging)

6In the absence of a requirement or election that paragraph 7 below should apply, the amount of interest at the official rate payable on a loan for any year (" the relevant year ") shall be ascertained as follows:

(a)take half the aggregate of—

(i)the maximum amount of the loan outstanding on 5th April preceding the relevant year or, if it was made in that year, on the date on which it was made, and

(ii)the maximum amount of the loan outstanding on 5th April in the relevant year or, if the loan was discharged in that year, the date of discharge ;

(b)multiply that figure by the number of whole months during which the loan was outstanding in that year, and divide by 12;

(c)multiply the result by the official rate of interest in force during the period when the loan was outstanding in that year or, if the official rate changed during that period, the average rate during that period ascertained by reference to the number of days in the period and the number of days for which each rate was in force.

For the purposes of this paragraph, months begin on the sixth day of the calendar month.

Election for alternative method of calculation

7(1)For any year of assessment ("the relevant year") the alternative method of calculation set out in this paragraph applies if—

(a)the inspector so requires, by notice in writing given to the employee, for the purpose of any assessment to income tax (or the adjustment of any such assessment in consequence of an appeal); or

(b)the employee so elects, by notice in writing given to the inspector within the time allowed by sub-paragraph (2) below.

(2)An election by the employee must be made—

(a)in a case where an assessment including the emoluments in question has been made on the basis of the normal method of calculation, within the time allowed for appealing against that assessment or such further time as the inspector may allow;

(b)where no such assessment has been made, within 6 years after the end of the relevant year of assessment.

(3)The alternative method of calculating the amount of interest at the official rate payable on a loan for the relevant year is as follows—

(a)take each period in the relevant year during which the official rate of interest remains the same ;

(b)for each such period take for each day in the period the maximum amount outstanding of the loan on that day, and add those amounts together ;

(c)multiply that sum by the official rate in force during the period divided by 365; and

(d)add together the resulting figures for each period in the relevant year.

PART IIIExceptions Where Interest Eligible for Relief

8(1)In this Part of this Schedule " eligible for relief", in relation to interest, means eligible for relief under section 75 of the [1972 c. 41.] Finance Act 1972.

(2)In determining for the purposes of this Part of this Schedule whether interest is eligible for relief there shall be disregarded the restriction imposed by section 75(3) of the [1972 c. 41.] Finance Act 1972 (which provides, in relation to certain loans taken out before 27th March 1974, that the first £35 of interest paid in any year is not eligible for relief).

9Section 66(1) does not apply to a loan in any year—

(a)for which interest is paid on the loan and the whole of that interest is eligible for relief, or

(b)for which no interest is paid on the loan but had interest been paid on it at the official rate the whole of that interest would have been eligible for relief.

10Where for any year interest is paid on a loan and part of that interest is eligible for relief, the calculation of the cash equivalent under Part II of this Schedule is modified as follows:—

(a)where paragraph 6 applies, the maximum amounts referred to in paragraph 6(a)(i) and (ii) shall be proportionately reduced by reference to the proportion which so much of the interest paid for that year as is not eligible for relief bears to the whole of the interest so paid ;

(b)where paragraph 7 applies, the maximum amounts referred to in paragraph 7(3)(b) shall be proportionally reduced by reference to the proportion which so much of the interest paid on each such amount for the day in question as is not eligible for relief bears to the whole of the interest so paid ; and

(c)the amount of interest eligible for relief shall be left out of account in ascertaining for the purposes of paragraph 5(1)(b) above the amount of interest paid for that year.

11(1)Where for any year no interest is paid on a loan but had interest been paid on it at the official rate part of that interest would have been eligible for relief, the calculation of the cash equivalent under Part II of this Schedule shall be modified as provided by paragraph 10(a) or (b) above with the substitution for the references to the amounts of interest paid or not eligible for relief of references to the amounts (ascertained in accordance with the following provisions of this paragraph) which would have been paid or would not have been eligible for relief.

(2)For the purposes of paragraph 10(a) as applied by this paragraph, the whole amount of interest at the official rate which would have been paid for any year shall be taken to be the amount payable for that year calculated in accordance with paragraph 6 (disregarding paragraph 10); and the amount of that interest which would not have been eligible for relief shall be ascertained—

(a)by finding that amount on the assumption that the amount referred to in paragraph 6(a)(i) was the amount outstanding for the whole year ;

(b)by finding that amount on the assumption that the amount referred to in paragraph 6(a)(ii) was the amount outstanding for the whole year ; and

(c)by adding together the resulting figures and dividing by 2.

(3)For the purposes of paragraph 10(b) as applied by this paragraph, the amount of interest which would have been paid and the amount of it which would not have been eligible for relief shall be ascertained on the assumption that interest at the official rate was paid daily throughout the year on the maximum amount outstanding on each day.

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