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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade, purpose: loans/advances to others: advance to secure a 10-year supply of raw material

S34 Income Tax (Trading and Other Income) Act 2005

Traders do not pay for goods ten years in advance

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.

As explained in BIM37755, the cost of trading stock is allowable and it is a question of fact whether money was paid to acquire trading stock or (wholly or partly) for some other purpose. Unless there are particular difficulties in obtaining and retaining a source of supply, it is extremely unlikely that a trader will pay for stock significantly in advance of receipt.

In the case of Charles Marsden & Sons Ltd v CIR [1919] 12 TC 217, the company advanced £30,000 to the Ha! Ha! Bay Sulphite Co Ltd, a Canadian company, at interest, to secure a supply of raw material, paper pulp. The Canadian company agreed to supply 3,000 tons per annum and to permit a deduction of £1 per ton from the agreed price, by way of repayment of the advance. During World War I the Government banned the import of paper pulp. The Canadian company declined to repay the £30,000 or interest thereon. Charles Marsden & Sons Ltd claimed that the £30,000 had been expended for the purposes of its trade and that a deduction was due in the year the money was paid.

Rowlatt J explained why the £30,000 was not an allowable deduction. Essentially a trader does not pay for goods ten years in advance. The £30,000 was effectively capital expenditure; representing an advance of money repayable by way of a discount on future supplies and in the interim attracting interest.

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

`It is not, any more than it was in the case of the English Crown Spelter Company Ltd v Baker [see BIM37755], merely a case of a payment in advance for goods. That is not the point of it. You do not pay in advance for goods simpliciter ten years in advance. It really is a venture by this Company of a sum of money in order to establish this source of pulp supply and it adventures this money on very special terms which are not exactly a loan but it is on very special terms; it puts down this big sum of money and it says to the pulp company: “There is that sum of money to encourage you. We undertake to take from you so much pulp in the year and you undertake to supply us, and you will gradually repay us this amount by having it taken off the price every year as the pulp comes in. In the meantime pay us six per cent We say nothing more about any other eventuality.” It seems to me they ventured that sum in the nature of a capital expenditure and not as a trade expenditure of the year at all and that the case is the same as the Crown Spelter case.’