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Where Taxpayers and Advisers Meet

Loan relationship trade or non trade debit

simplytax
Posts: 85
Joined: Wed Aug 06, 2008 3:34 pm

Loan relationship trade or non trade debit

Postby simplytax » Wed Mar 05, 2014 7:19 pm

If a company borrows money to pay CT to HMRC is the interest payable trade or non trade where the company has both investment and trading activities ? Are you expected to dissect the CT liability between trade and non trade elements to determine the purpose and use of the money borrowed? If interest payable on the overdue tax is non-trade loan relationship debit is the interest payable on the money borrowed to pay the overdue CT not also non trade loan relationship?

bd6759
Posts: 3109
Joined: Sat Feb 01, 2014 3:26 pm

Re: Loan relationship trade or non trade debit

Postby bd6759 » Wed Mar 05, 2014 9:13 pm

Tax is not a trading expense so it is all NTLR

simplytax
Posts: 85
Joined: Wed Aug 06, 2008 3:34 pm

Re: Loan relationship trade or non trade debit

Postby simplytax » Thu Mar 06, 2014 12:04 pm

Where does it say that the use of the money borrowed has to be a tax deductible expense?

A wholly trading company may borrow to acquire an asset to be used in the trade but the asset would not be a tax deductible expense. The interest on the loan to acquire the asset however would be a trade LR debit.

If the purpose of the borrowing is to enable payment of tax arising from the trading activity then why is the purpose not for the trade as not to pay the tax would be detrimental to the trade.

section 44
Posts: 4468
Joined: Thu Oct 30, 2008 12:47 pm

Re: Loan relationship trade or non trade debit

Postby section 44 » Thu Mar 06, 2014 2:17 pm

fair comments simplytax

Lambs
Posts: 1429
Joined: Wed Aug 06, 2008 3:15 pm

Re: Loan relationship trade or non trade debit

Postby Lambs » Thu Mar 06, 2014 2:24 pm

Could it not be argued that the loan was taken out merely to fund working capital? In other words, a trading purpose? I don't see a non-trading activity. Have they bought an investment property, or BT shares? No

Lambs

bd6759
Posts: 3109
Joined: Sat Feb 01, 2014 3:26 pm

Re: Loan relationship trade or non trade debit

Postby bd6759 » Fri Mar 07, 2014 6:03 pm

Paying tax is not a trading activity. Tax is a distribution of profits.
That said, I agree with Lamb. The loan could be seen as working capital introduced and as such allowed as a trading deduction (the same way as interest on an overdrawn bank account would be allowed if paying the tax caused the account to be overdrawn).

Lambs
Posts: 1429
Joined: Wed Aug 06, 2008 3:15 pm

Re: Loan relationship trade or non trade debit

Postby Lambs » Sat Mar 08, 2014 8:44 pm

B, I think that your interpretation of the point of the expenditure is too narrow. I invite you to consider what would be the implications of NOT paying the tax on business profits..?

The following is an extract from BIM37300, in relation to some Argentinian tax paid on an overseas PE:

The Courts considered the meaning of the words ‘for the purposes of the trade’ in the case of Harrods (Buenos Aires) Ltd v Taylor-Gooby [1964] 41 TC 450. The case concerned a UK company trading in Argentina. The company was required to pay an Argentine ‘substitute tax’ (not an income tax) which was charged annually on a percentage of the company’s capital, whether or not there were profits chargeable to Argentine income tax. The courts held that the tax paid was an allowable deduction.

In the Court of Appeal, Danckwerts LJ, said that he found it difficult to follow Lord Greene’s view expressed in Rushden Heel Ltd v Keene [1948] 30 TC 298 (see BIM37060) of a distinction between payments made by a trader in the character of taxpayer and not, or not wholly, as trader. Danckwerts expressed the guiding principle in the following terms. If the payment is made:
•for the purpose of gaining the company profits - it is deductible
•after the profit has been ascertained - it is not a deduction from but an application of profit

Diplock’s judgment explains how the ‘capacity’ test is to be applied. But you should always remember that the statutory test is whether the expense is laid out for the purposes of the trade. Identifying the capacity in which a taxpayer incurs an expense is a means to an end, the end being to decide what is the true purpose of the expenditure.

Diplock LJ asked for what purpose the company had expended the money. If not for the purpose of the trade, then for what? Diplock said that the evidence found by the Commissioners pointed to no other purpose. Diplock went on to explain why the so-called ‘capacity’ test is of doubtful utility in 41 TC starting on page 468:

`…the only question here is: was the money paid by the Company in settlement of its liability for Argentine substitute tax, “money wholly and exclusively expended for the purposes of the trade” which it carried on in the Argentine? In order to engage lawfully in its trading activities in the Argentine at all, whether or not it made a profit by doing so, it had to pay the substitute tax. That was the purpose for which the money was expended by the Company. None other is suggested. Why, then, is it not deductible?

It is contended for the Crown that the Company paid the tax in its capacity as a taxpayer, not in its capacity as a trader. But with great respect to Lord Greene, MR's judgment in the Rushden Heel Co's case [see BIM37060], on which this contention was mainly based, this is merely playing with words. As pointed out by Willmer, LJ, this ratio decidendi was not adopted by the House of Lords in the same case and cannot, in my view, survive Lord Atkinson's earlier criticism of a similar argument in the Lion Brewery case [5 TC 568], which Willmer, LJ, has already cited. You can always find some label other than “trader” to describe the capacity in which a trader makes any disbursement for the purposes of his trade. He pays rent for his business premises in the capacity of “tenant”, rates in the capacity of “occupier”, wages in the capacity of “employer”, the price of goods in the capacity of “buyer”. But if he has become tenant or occupier of those particular premises, employer of those particular servants or buyer of those particular goods solely for the purposes of his trade, the money which he has expended in any of the capacities so labelled is a deductible expense in computing the profits of his trade.’


S, the case bears scrutiny in full. But it seems that HMRC is in accord with the sentiment.

Regards,

Lambs

bd6759
Posts: 3109
Joined: Sat Feb 01, 2014 3:26 pm

Re: Loan relationship trade or non trade debit

Postby bd6759 » Mon Mar 10, 2014 10:29 pm

You need to go back to your manuals and do that module again. You have missed the point of that case.

You do not pay income tax for the purposes of the trade.

Lambs
Posts: 1429
Joined: Wed Aug 06, 2008 3:15 pm

Re: Loan relationship trade or non trade debit

Postby Lambs » Tue Mar 11, 2014 8:36 am

B, I thank you for your comment but should respectfully point out that these are not training manuals but those published by HMRC. Albeit their quality is frequently questioned. Nevertheless it is not so much HMRC's comments but those of the LJ Diplock to which I refer. I think also that it is entirely possible for a judgment to make more than one point. Ideally, they will make several, so we have to learn the facts of fewer.

His argument, to paraphrase, is that the only reason why the trader is making a payment as a taxpayer is because he is trading. It is therefore inappropriate to focus solely on the reason for that transaction in isolation but one should, instead, consider how he got there.

As I said before, the company has not laid out surplus funds to acquire an investment asset, but is paying its business tax. It seems the courts (and HMRC) are happy to consider the payment of foreign tax as an allowable expense so I am suggesting that UK tax ought also to be considered in like vein - a by-product of trading. Notwithstanding that, from accounting principles, tax is evaluated after profits have been struck.

Perhaps you would be kind enough to explain what you think is the point of that case?

Regards,

Lambs

simplytax
Posts: 85
Joined: Wed Aug 06, 2008 3:34 pm

Re: Loan relationship trade or non trade debit

Postby simplytax » Thu Mar 20, 2014 6:28 pm

Lambs - thanks for the considered thoughts on this but if HMRC were of the view that you can dissect the CT liability between trading and non trading as a basis of apportioning interest paid on a loan borrowed to pay the CT liability, how does that square with the fact that interest on late paid CT is wholly a non trade LR debit, irrespective of whether the liability is on trade or non trade profits?


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