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Ask Your Own Question, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 5113
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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I had to borrow £1900 in 2013 to buy tools to start up a new

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I had to borrow £1900 in 2013 to buy tools to start up a new window/gutter cleaning business from my Father In-law. I did enter this as a income on 2012/2013 tax return under loan. I have been trying to pay it back every year since. This year I have noticed that the accountants left it of my return, so I questioned it. All they would say was because it is interest free, I can not claim it out of the business outgoings. How is this right, if it wasn't for the money start up, I would not have a business. Please help, I am on low income and can not have these payments coming out of potential wages instead of the business costs.
Hello and welcome to the site. Thank you for your question.

May I ask why you entered the loan as income... as loans are not income at all?

The correct treatment of this amount should have been
Monies borrowed to start a business are balance sheet item and not trading income.
Utilisation of this loan to buy tools, equipment etc would have been expensed in the normal way and you would claim it against profits so you lower the tax to be paid on profits.

When the monies are paid back, they offset against amounts outstanding (or start up loan) .. no impact on income or expenses on which income tax is levied.

Although you don't show the repayment of loan as a business cost/expense, you show what it has been spent on as a cost/expense instead and claim tax relief.

You should correct your tax return for 2012-13 so that you are not taxed on that loan of £1,900.

I hope this is helpful and answers your question.
Customer: replied 2 years ago.

I entered it in as a income because I thought I needed to. I have not had to pay tax for the past 2 years because my income has not gone over my personal allowance. It has been really hard to get the business moving forward. What can I do about paying back this loan without it having to come out of my profits? I have paid back £1200 out of the £1900 but like I have said, I have just noticed that in the past 2 years returns they were not counted.

Gavin, thank you for your reply and for some clarification.

First of all, entering it as income was wrong.

Furthermore, your net profits after expenses are below your personal allowance, so you have not paid any tax resulting from this error.

As I explained in earlier posting, any repayment of loan is ignored for tax purposes although you are making a repayment out of earned income.

This repayment should not be declared on our tax return as it is not an expense. What would have been declared is the expense that was funded by the loan.

I am sorry to say that you can't do use the repayment as a business expense as you would have already used the expense the loan related to as a business expense as and when incurred against your profits. Using repayment as well would mean double counting.

This may not be the news you wished to hear, I'm afraid.

I hope this is helpful.
Customer: replied 2 years ago.

I do understand that you may be talking English to you but to me, it may as well be in a foreign language. So in simple terms, are you saying that I can not repay the loan out of the business and it will need to be paid back out of my personal pocket. I am sorry I do not understand

Gavin, thank you for your reply

I was talking in English that we both can understand and I owed it to you to explain the correct treatment and implications of loans on trading profits.

In simple terms, I am saying that you can not repay the loan and treat it as a business expense, it would be treated as if paid out of your personal pocket.

I hope this is helpful.. and other Tax Specialists are ready to help you
I thank you for accepting my answer.

Best wishes.