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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Specific deductions: bad & doubtful debts: advances on loan

Income Tax

Broadly speaking, the making of loans or advances constitutes an investment of capital and any loss arising on such transactions is inadmissible as a deduction. The only exceptions are where:

  • the trader is a banker, or
  • a moneylender, or
  • the lending of money is an operation ancillary to and an integral part of another existing trade.

(See Reid’s Brewery Co Ltd v Male [1891] 3TC279; English Crown Spelter Co Ltd v Baker [1908] 5TC327; CIR v Hagart & Burn-Murdoch [1928] 14TC433; WA & F Rutherford v CIR [1938] 23TC8; Bury & Walkers v Phillips [1951] 32TC198.)

As evidence of the admissibility of a deduction under this head claimed by a trader, you should consider if it is customary for persons in that particular type of trade to make similar advances on loan. The absence of such a custom does not in itself necessarily preclude the allowance of a loss but may be used as an indicator when deciding on the admissibility of the deduction.

An operation which, although not in the form of an advance on loan, is in essence clearly of that character should in this connection be treated as such for tax purposes. Such a transaction may occur for example where payment is made in advance, in exceptional circumstances outside the ordinary course of business, against future deliveries of goods (Charles Marsden & Sons Ltd v CIR [1919] 12TC217 - for a fuller description of the circumstances of this case see BIM37760 and BIM37790). Similarly, the purchase of goods from a subsidiary or associated company at an excessive price may in essence be an advance (see CIR v Huntley & Palmers Ltd [1928] 12TC1209).

As regards bridging loans made by solicitors see BIM65830.

Corporation Tax

Loans and advances made by companies are dealt with under the loan relationship rules. See CFM30000 onwards.