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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade, purpose: loans/advances to others: temporary loans made by brewer

S34 Income Tax (Trading and Other Income) Act 2005

Ancillary trade of money lending

For companies chargeable to Corporation Tax, the tax treatment of loans and advances is now governed exclusively by the loan relationships regime in Parts 5 and 6 Corporation Tax Act 2009. Detailed guidance is at CFM30000. The guidance below only applies to other categories of taxpayer.

To determine whether a particular expense was incurred wholly and exclusively for the purposes of the trade it is essential that you fully establish the nature and extent of the taxpayer’s trade.

In the case of Reid’s Brewery Co Ltd v Male [1891] 3 TC 279, the company carried on the trade of brewers and also owned tied houses which were let to tenants. The brewer made loans to the tenants and to other customers. The loans were usually of a temporary nature and were made on various classes of security.

The Commissioners took the view that the loans were made for the purpose of extending the brewer’s trade and were of a ‘capital’ nature. The Commissioners also took the view that the brewer had no trade other than that of brewing.

Pollack J was satisfied that the evidence before the Commissioners established that:

  • in addition to brewing the company also carried on an ancillary trade as a financial concern
  • that the loans were not investments of fixed capital, but in view of the particular nature of the trade represented circulating capital employed in money lending, and
  • that the losses were allowable

The loans or advances were not capital and were found to be made wholly and exclusively for the purposes of the trade. The deduction was therefore allowable.

The part of Pollock J’s judgment on which the above guidance is based is set out below:

`I do not think anybody who reads this case and is at all acquainted with the custom of brewers in large towns can suppose that this particular firm or company carry on business as money lenders only; but what they really do is to carry it on as an adjunct, ancillary to and a very advantageous adjunct to their business as brewers. That being so, I think the real question which is arguable in this case is, whether the money so, I should not say laid by, but so used or expended, is to be treated as capital account? Of course, if it be capital invested, then it comes within the express provision of the Income Tax Act, that no deduction is to be made on that account. That is provided for most clearly by the statute, but I think myself it would be a fallacy to call this money which is so dealt with by the Appellants, capital invested. In the first place, it is found upon the facts, in no case is any loan or advance made by them a permanent investment, whether it be by way of deposit of deeds, mortgages, promissory notes, or otherwise. That of itself might not be sufficient, but when you come to read what is the course of dealing, no person who is acquainted with the habits of business can doubt that this is not capital invested. What it is is this. It is capital used by the Appellants, but used only in the sense that all money which is laid out by persons who are traders, whether it be in the purchase of goods be they traders alone, whether it be in the purchase of raw material be they manufacturers, or in the case of money lenders, be they pawnbrokers or money lenders, whether it be money lent in the course of their trade, it is used and it comes out of capital, but it is not an investment in the ordinary sense of the word.’

The part of Charles J’s judgment on which the above guidance is based is set out below:

`I think the legitimate conclusion from those statements is this, that the Appellants carry on the brewing business with this business of money lending as a branch or adjunct to it.

Then, it being one business and not two, are they entitled to the exemption of this sum of £16,000 which they claim? I think that they are…I think that, upon the findings of this case, this money was money laid out and expended exclusively for the purpose of the brewing trade carried on by the Appellants; and, that being so, it is a legitimate subject of deduction in arriving at the balance of the profits and gains…’