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HMRC internal manual

Business Income Manual

Capital/revenue divide: intangible assets: incidental expenditure incurred in financing the business

To decide if incidental expenditure incurred in connection with the financing of the business is capital or revenue, you have to determine the character of the finance itself.

If it is of a capital nature (for example share capital) then the expenditure in connection with that liability is also likely to be capital. Note that the capital/revenue distinction does not affect the treatment of items dealt with under the loan relationship regime for corporate taxpayers— see CFM30110 onwards.

In Beauchamp v F W Woolworth plc [1989] 61TC542 the borrowing of definite sums for fixed five-year terms, and which gave rise to exchange rate losses, was held to be capital.

In Texas Land and Mortgage Company v Holtham [1894] 3TC255 commission paid to brokers and the other expenses incurred in raising money (in the form of debentures), to be lent on at a higher rate of interest, was held to be capital. Mathew J explained why (page 260):

‘The amount paid in order to raise the money on debentures, comes off the amount advanced upon the debentures, and, therefore, is so much paid for the cost of getting it, but there cannot be one law for a company having sufficient money to carry on all its operations and another which is content to pay for the accommodation.’

S58 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) now allows the deduction of certain incidental costs of raising loan finance for Income Tax purposes. You should refer to BIM45800 onwards for guidance on the amounts allowable. Any costs not specifically relieved under S58 ITTOIA 2005 (for example, a penalty for early repayment) remain disallowable as capital. Expenses incurred on obtaining loan finance by corporate taxpayers are dealt with under the loan relationship regime — see CFM30110 onwards.

In the case of Ascot Gas Water Heaters Ltd v Duff [1942] 24TC171 the company had incurred substantial debt to its German supplier of raw materials and was using this credit as a means of financing its operations. The German company became anxious and asked for a guarantee. The Dutch company that controlled Ascot gave the guarantee in return for a commission. Ascot also borrowed £150,000 secured by mortgage debenture stock and guarantee, also in return for a commission, given by the Dutch bankers who controlled the Dutch company. The courts allowed the commission on the raw materials debt guarantee but not the other. Lawrence J quoted from the judgment in The European Investment Trust Co. Ltd v Jackson [1932] 18TC1, where Finlay J at pages 11 and 12 said that the costs of anything more than a mere temporary accommodation are capital:

‘…if you get that company getting, as such companies constantly do get, temporary loans from their bank - accommodation, I suppose, for sometimes twenty four hours, or even less, sometimes for a good deal longer - if you get that sort of thing, then the interest on that money, the hire, so to speak, paid for that money, may properly be regarded as an expenditure of the business, an outgoing to earn the profits. On the other hand, if the truth of the thing is that by the payment of the interest the company does not obtain mere temporary accommodation, day to day accommodation of that sort, but does, in truth, add to its capital and get sums which are used as capital and nothing else, then I think that in that case all the authorities show that that deduction cannot properly be made.’