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HMRC internal manual

Business Income Manual

Specific deductions: guarantee payments: loan guarantee

A payment made under a loan guarantee is deductible only if:

  • the guarantee, when it was made, was wholly and exclusively for the purposes of the trade and
  • a capital advantage is not secured by it.

Wholly and exclusively

If you want to decide whether the wholly and exclusively condition is satisfied you must establish in detail what exactly the trade of the person giving the guarantee (the ‘guarantor’) comprises and whether the giving of guarantees in favour of clients is an ordinary activity in the course of carrying on that particular trade.

A guarantee payment is likely to fail the wholly and exclusively test where:

  • there is no trading relationship between the guarantor and the person covered by the guarantee, or
  • the guarantee was given for the purpose of a non-trading relationship such as that of associate of, or investor in, the guaranteed person.

See for example, Homelands (Handforth) Ltd v Margerison [1943] 25TC414, Garforth v Tankard Carpets Ltd [1980] 53TC342, Baker v Mabie Todd and Company, Limited [1927] 13TC235 and the Special Commissioners decision in Redkite Ltd v CIR [1996] SpC93 (see BIM37797), where there were non-trading purposes for giving the guarantees.

On the other hand in Bolton v Halpern & Woolf [1980] 53TC445, a payment by an accountants partnership under a guarantee entered into by a deceased partner was held to be wholly and exclusively for the purposes of the partnership’s profession.

Guidance on advances and guarantees by solicitors is at BIM65830.

Guidance on wholly and exclusively generally is at BIM37000 onwards.

Capital or revenue

To decide the capital or revenue nature of a guarantee payment it is necessary to examine all the facts surrounding the initial giving of the guarantee and the subsequent payment, not just the purpose of the payer.

A guarantee payment is likely to be a revenue expense if the guarantee is for a short period, and is made to help get or keep income-producing contracts. It is immaterial that a contract may not have been obtained. See Morley v Lawford and Company [1928] 14TC229 (see BIM37780), Jennings v Barfield [1962] 40TC365 (see BIM37775) and Lunt v Wellesley [1945] 27TC78 (see BIM37785).

But a guarantee payment is likely to be capital if the guarantee was given:

  • to acquire, dispose of, improve or modify a capital asset or investment, or
  • for a lengthy period and secured an enduring business advantage.

An enduring improvement to the whole profit-making apparatus could be an advantage of a capital nature.

Guidance on the capital/revenue divide generally is at BIM35000 onwards.

Guarantees between grouped/associated companies

A payment under a loan guarantee provided for a grouped, subsidiary or associated company may be:

  • not wholly and exclusively for the purpose of the payer’s trade, and/or
  • capital, as it may be intended to safeguard a capital interest in the related concern.

See Milnes v J Beam Group Ltd [1975] 50TC675, Garforth v Tankard Carpets Ltd [1980] 53TC342 (see BIM37065) and the Special Commissioners decision in Redkite Ltd v CIR [1996] SpC93 (see BIM37797).