Section 182 | Normal method of calculation: averaging

From legislation.gov.uk

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 1Calculate 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 2If 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 3Calculate the amount of interest that would be payable on the loan for the tax year at the official rate as follows—

Formula

A \times I \times \frac{M}{12}

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.