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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Foreign exchange: gains or losses: capital or revenue: use of money

In Beauchamp v F W Woolworth plc [1989] 61TC542, Hoffmann J on page 563G cited with approval the comments of Vinelott J in Pattison v Marine Midland Ltd [1983] 57TC219 at page 245A:

‘… that in a doubtful case the use made by a company of moneys borrowed - whether the moneys are embarked in the trade in the acquisition of current assets or otherwise, on the one hand, or are retained on deposit or invested or used in the acquisition of fixed assets, on the other hand - may throw some light on the character of the borrowing.’

Although the case involved a company and so would now fall under the loan relationship rules (see BIM39501), the principles established continue to apply to unincorporated traders. Thus borrowings are likely to be capital if the funds are retained on deposit, invested or used in the acquisition of fixed assets. In contrast, they are likely to be of a revenue nature where they are used to acquire current assets (for example, trading stock), or used to meet ordinary trading expenses.

If, however, borrowings are used to finance the normal recurring business operations but are so significant in amount that they could not be repaid without causing the business to collapse, then it will be proper to regard them as on capital account.