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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade, purpose: loans/advances to others: solicitor guaranteeing client's borrowing

S34 Income Tax (Trading and Other Income) Act 2005

For what purpose was the guarantee given?

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.

A loss incurred by a firm of solicitors who guaranteed a client’s bank account was allowed in Jennings v Barfield [1962] 40 TC 365. This is in contrast with the decision in CIR v Hagart and Burn-Murdoch [1929] 14 TC 433 (see BIM37770).

Barfield’s client had carried on the trade of a motor engineer and garage proprietor for many years.

The Commissioners found that:

  • the solicitors for many years acted for a Mr Knight in connection with his business and otherwise, and had in the last two or three years, acted in 12 or more transactions
  • shortly before the guarantee was given, Mr Knight decided to move from Shepreth, dispose of his premises and acquire new premises at Cambridge
  • the solicitors proceeded to act for Mr Knight concerning the sale of a house, the acquisition of land adjoining the house for the purposes of the sale, the acquisition of showrooms at Cambridge and the purchase of a house there
  • Mr Knight needed an overdraft to complete the lease of new showrooms, to pay a deposit on a house he was purchasing and to provide funds for carrying on his business
  • a partner, acting on behalf of the solicitors, guaranteed Mr Knight’s borrowing - at the time the partner having a considerable sum on deposit at another branch of the Bank
  • Mr Knight was subsequently adjudged a bankrupt and the solicitors became liable to pay, and paid, the sum of £412 under the guarantee
  • for 30 years it had been the solicitors’ practice to guarantee loans for a client during a transaction to assist the client until the completion of the transaction
  • the partner, when he signed the guarantee, believed the overdraft would soon be repaid, either by reason of the sale of Mr Knight’s property or by the prosperity of Mr Knight’s business, and the partner was desirous of retaining Mr Knight as a client
  • although the solicitors had often given guarantees, this was the first occasion that they had been called upon to make a payment

The Commissioners allowed the deduction.

Pennycuick J explained why the loss was deductible. There was evidence before the Commissioners that it was the practice of some solicitors to give guarantees. The judge considered this to be part of the activities of the profession of a solicitor; particularly where the guarantee was given in relation to a transaction where the solicitor was acting professionally for the borrower.

Pennycuick J goes on to distinguish CIR v Hagart and Burn-Murdoch [1929] 14 TC 433 (see BIM37770) on two grounds:

  1. the activity in Jennings v Barfield [1962] 40 TC 365 was not the making of advances but the giving of guarantees
  2. there was factual evidence before the Commissioners of the growing practice of solicitors giving such guarantees

The Judge emphasised the differences of fact between the two cases and that these resulted in different conclusions.