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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade, purpose: loans/advances to others: payment under guarantee given to exhibition

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.

As explained in BIM37770, traders from time to time lend money to their customers and the question of whether any losses may be allowed in computing trade profits turns on the purpose of such loan or advance. Was the making of the loan or advance wholly and exclusively for the purposes of the lender’s trade?

Similarly, traders may give guarantees of customer loans or indebtedness to third parties. Amounts paid under such guarantees will only be allowed if the guarantee was given wholly and exclusively for the purpose of the trade, profession or vocation of the lender and the loss was not on capital account.

In Jennings v Barfield [1962] 40 TC 365 (see BIM37775), the loss incurred by a solicitor in guaranteeing a client’s bank loan was allowed. In the case of Morley v Lawford [1928] 14 TC 229, the loss sustained by a firm of asphalters under a guarantee was also allowed.

The company was guarantor to the extent of £500 to the Wembley exhibition and sought a deduction for the sum of £375 that they were eventually called upon to pay. The company became guarantors because they had been assured that they would be given preference in the allocation of contracts for work at the exhibition. In the event they were not given the opportunity to tender. The company traded as asphalters. The company not being invited to tender was held to be an irrelevance, it would have made no difference to the approach if they had been successful and won a lucrative contract. The issue was whether the liability as guarantor was undertaken for the purposes of their trade.

The Commissioners found that the sum paid under the guarantee was incurred wholly and exclusively for the purposes of the company’s trade.

In the High Court, Rowlatt J reversed the Commissioners on the grounds of ‘remoteness’. The Court of Appeal reinstated the Commissioners’ decision on the grounds that there was no evidence in the stated case that the company when giving the guarantee had any purpose in mind other than the furtherance of their trade by getting contracts for work. In the Court of Appeal, the Master of the Rolls, Lord Hanworth, explained the difficulty in deciding wholly and exclusively cases. There was no universal touchstone. After discussing whether the issue was one of fact or law, Lord Hanworth explained that the Commissioners’ decision should be reinstated because it was one that they were entitled to reach on the evidence before them.

You should note the importance attached to establishing in detail what exactly the trade comprises. Does the payment fall within the scope and conduct of the actual trade carried on? If it does (as in Jennings v Barfield, see BIM37775, and Morley v Lawford) then you should allow any loss. If it does not (as in CIR v Hagart and Burn-Murdoch [1929] 14TC433, see BIM37770)then no allowance is due. Each case turns on its own particular facts.

Where the payment was for the purpose of the payer’s trade you should then consider if it was on capital account, see BIM35000 onwards.

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

`Now it is clear that however much you may try, it is extremely difficult to lay down any fast rule by which you can apply a definite to touchstone to determine whether a proposed deduction falls to be allowed under those principles. Lord Loreburn says in the Woodifield case [see BIM37300]: “Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise”. It is important to bear in mind that well founded observation, if I may respectfully say so, in the consideration of the present case. You cannot find a formula, which will answer the question off-hand. The difficulty is illustrated by the number of cases which have been decided on the one side and on the other. For instance, in the Stott case [see BIM37765] it was determined that the loss of certain shares which were taken up for the purpose of enhancing the business of the Appellant and which were ultimately sold for the purpose of providing funds for securing new contracts, was a loss of capital and was not an admissible deduction in arriving at the Appellant’s profits…

…After looking at the cases which have been decided on the one side and on the other - cases in which the answer has been “no” and cases in which the answer has been “yes” to the deduction claimed - it appears to me that as a matter of business it is impossible on the facts of this present case to say that this contribution lies so far outside the scope and purpose of the business they carried on as to make it impossible for the Commissioners to come to the conclusion they did. Many illustrations can be given and suggested. Some are suggested by the learned Judge in his judgment. The question of a contribution to a hospital on the one side, the cost of advertising on the other. But all those illustrations bring into purview the consideration that this must be a matter of degree. What is allowed in one business could not be allowed in another; what is wholly extraneous in one business may be germane to another. It appears to me, after very carefully considering the facts and applying the Rules most closely as contended for by the Attorney-General, there is evidence upon which the Commissioners could reach the conclusion which they have reached. They could decide upon the facts that both the tests required by Lord Cave are answered, and therefore it appears to me that the learned Judge was not justified in overruling a decision on a question of fact, more especially as the duty of assenting to what are questions of fact and not disturbing them has been re-affirmed by the House of Lords in the Lysaght case [13 TC 511].’