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Where Taxpayers and Advisers Meet

Loan relationship trade or non trade debit

Lambs
Posts: 1428
Joined: Wed Aug 06, 2008 3:15 pm

Re: Loan relationship trade or non trade debit

Postby Lambs » Fri Mar 21, 2014 8:07 am

Because it is explicitly made so by statute. If that be the case, then it could be argued that it would not be otherwise. Note also that it is only the interest on such outstanding balances. What about interest on trade debts? Did a trade debt come about by non-trading means?

Regards,

Lambs

Incredulum
Posts: 2723
Joined: Thu Dec 03, 2009 5:35 pm

Re: Loan relationship trade or non trade debit

Postby Incredulum » Tue Mar 25, 2014 3:16 pm

The problem arises as cash is fungible. And as there is no case law as precedent it is difficult to come to a firm conclusion.

The cash all goes into the working capital pot of the business. I presume that the business has secured loans on its investments which it treats as NTLR and the balance funds working capital and thus is allocated to trading? In which case I should be inclined to stick with this approach.

I think it depends on what happens to the surplus cash from the investment activity. I am presuming the company has an investment property. If the full amount of excess of rent over interest is used to amortise the loan then an element of your tax interest cost relates to the investment business. If the loan is amortised on a post-tax basis then the cash for the tax element of the profit has gone into the trading business, and thus taking the cash out - by borrowing - to pay the tax gives rise to a trading deduction for the interest.

Lambs
Posts: 1428
Joined: Wed Aug 06, 2008 3:15 pm

Re: Loan relationship trade or non trade debit

Postby Lambs » Tue Mar 25, 2014 3:23 pm

Eh? It's a tax bill..?

Incredulum
Posts: 2723
Joined: Thu Dec 03, 2009 5:35 pm

Re: Loan relationship trade or non trade debit

Postby Incredulum » Tue Mar 25, 2014 3:24 pm

Indeed; which is funded out of working capital. I'm not sure what your point is?

Lambs
Posts: 1428
Joined: Wed Aug 06, 2008 3:15 pm

Re: Loan relationship trade or non trade debit

Postby Lambs » Wed Mar 26, 2014 8:02 am

There is no mention of investment activity. There's a CT debt. Your point is..?

King_Maker
Posts: 6538
Joined: Wed Aug 06, 2008 3:22 pm

Re: Loan relationship trade or non trade debit

Postby King_Maker » Thu Mar 27, 2014 1:06 am

There is no mention of investment activity. There's a CT debt. Your point is..?
The OP mentions it on line 1 in his first post ".....where the company has both investment and trading activities."

Lambs
Posts: 1428
Joined: Wed Aug 06, 2008 3:15 pm

Re: Loan relationship trade or non trade debit

Postby Lambs » Thu Mar 27, 2014 6:51 am

Ah...

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

Re: Loan relationship trade or non trade debit

Postby simplytax » Thu Mar 27, 2014 6:10 pm

An interesting dialogue and views. It may not be uncommon for companies with mixed investment and trading activities to borrow money to meet working capital part of which is used to pay a CT bill or in this case to borrow specifically to meet a CT bill. If part is unsecured and part secured over investment properties is it not the purpose of the borrowing ( ie whether to meet a trade purpose or not ) at the outset that is relevant, irrespective of what assets are put up as security or from where surplus funds come from in future to repay the loans. If a CT bill has arisen due to liabilities mainly from capital gain, rental income and to a lesser extent trading can it be said that the payment of the CT bill may be partially for a trading purpose ( or is it the consequence from making a trade profit adding to the CT liability rather than for the purposes of a trade ) or, is it more likely ( as I suspect HMRC would contend ) that it is a non trading purpose to borrow to pay a CT debt.

Incredulum
Posts: 2723
Joined: Thu Dec 03, 2009 5:35 pm

Re: Loan relationship trade or non trade debit

Postby Incredulum » Fri Mar 28, 2014 2:26 pm

I think you can put together three strong arguments. Looking at the numbers might make one of them the obvious solution.

1. Your investment properties (? - I presume they're properties) are already funded by a combination of bank loan and equity. Assuming these make a profit, then they contribute towards the available working capital of the trading business and funding the tax is a trade debt as it's just funding your working capital, as your investments are already fully funded. Hence trading.

1b. If the investment properties make a loss, then you're borrowing to fund the working capital of the investment business. Hence NTLR.

2. Pro-rate the tax between the two businesses and pro-rate the interest accordingly between NTLR and trading.

3. Tax is a non-trade item, you are specifically borrowing to fund the tax; tax is not a trading deduction. Hence it's NTLRs.


I could imagine HMRC arguing any of these if it suited them, I think you can too. So do what suits your client best...


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