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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade, purpose: loans/advances to others: loans by a firm of solicitors

S34 Income Tax (Trading and Other Income) Act 2005

Money lending by solicitors not uncommon but is it truly part of their profession?

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.

From time to time traders lend money to their customers. Most frequently this takes the form of making sales on credit terms. Allowance for the non-receipt of trading income is provided in the bad debts legislation in S35 Income Tax (Trading and Other Income) Act 2005 (see BIM42700 onwards). Traders may make loans or advances in other circumstances and the question of whether any ensuing loss may be allowed in computing trade profits turns very much on the purpose of such loan or advance.

In the case of CIR v Hagart and Burn-Murdoch [1929] 14 TC 433, a firm of writers to the signet (the Scottish equivalent of solicitors) was not allowed a deduction for losses on loans or advances. The decision may be contrasted with that in Jennings v Barfield [1962] 40 TC 365 (see BIM37775).

As legal representatives of a private ‘experimental’ company, the firm advanced money to the company on unsecured terms. The company was interested in the development and manufacture of a new metal alloy but was unsuccessful and the advances were lost. The firm claimed that the making of loans was a part of their profession as law agents, or so closely associated with it that the loss was an allowable expense in computing their profits. The loans had been made in the hope of securing further business if the company was successful and loans had been advanced to other clients in similar circumstances.

It was held that the loss was not an allowable deduction. The House of Lords took the view that whilst money lending by solicitors was not uncommon, it was not truly a part of a solicitor’s profession. Their Lordships therefore distinguished this case from that of Reid’s Brewery Co Ltd v Male [1891] 3 TC 279 (see BIM37753).

Lord Buckmaster explained that no deduction was due because the facts and circumstances of the loans had not been established. There was no finding as to:

  • the circumstances in which the loans were made
  • whether the loans bore interest, and
  • the object for which the loans had been made

It therefore followed that there was no question of the loans being made in the course of professional work. The judge concluded that money lending was a separate activity from the firm’s profession and so the losses were not allowable.

Lord Shaw of Dunfermline expressed considerable scepticism that, notwithstanding the actual practice of this particular firm, money lending could ever truly be part of the profession of solicitor. The loans or advances were not therefore advanced wholly and exclusively for the purposes of the firm’s profession. The fact that the making of loans was a significant feature of this particular firm’s affairs did not make money-lending part of their profession as solicitors.

Lord Warrington of Clyffe concurred, attaching particular importance to the finding of fact before the Commissioners that there was not a general practice amongst Edinburgh solicitors of lending money. The loans were therefore outside the profession that was subject to tax and no relief was due.