Amortisation of Arrangement Fees for Long Term Loans

Significant arrangement and other fees associated with long term loans must be capitalised and charged to profits and tax over the life of the loan.

Why Capitalise Loan Fees

Arrangement fees, due diligence or other costs attached to business loans are not always tax deductible in the year that they were charged.

That is because if the costs are significant and represent a significant proportion of the expected interest payable, HMRC will expect them to be capitalised and amortised.

That will mean turning the total value of the cost into an "intangible asset" followed by charging that in equal amounts against taxable profit over the lifetime of the loan. The annual amortisation charge is then deductible from taxable profit.

How Amortisation of Fees Works

For example, take an five-year loan subject to an arrangement fee of £7,000 plus accountancy costs of £2,000 and legal fees of £1,000. This £10,000 total will be shown in the balance sheet as an intangible asset to be amortised (i.e.) written down against profits at the rate of £2,000 annually over five years.

Note that amortisation chargeable over the next twelve months is classified as a current liability. The balance is classified as a long term liability.

Intangible Asset - Writen Down Values
  Year 1 Year 2 Year 3 Year 4 Year 5
Intangible B/Fwd 10,000 8,000 6,000 4,000 2,000
Charged to Profit 2,000 2,000 2,000 2,000 2,000
Intangible C/Fwd 8,000 6,000 4,000 2,000 0
Current Liability 2,000 2,000 2,000 2,000 0
Long Term Liability 6,000 4,000 2,000 0 0

Forecasting and Planning with Figurewizard

To view how Figurewizard creates forecasts profit & loss; balance sheets, liquidity and cash flow forecasts simply using your predicted figures for sales, margins, overheads and so, follow the links below,

All sample forecasts are live working examples. Follow to link below to the What-If calculator and planner to interact with them.

The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 Business Planning and Forecasting: What to Look For. Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions Depreciation What is Business Operating Activity What are Fixed Assets