Specific deductions - interest: General business accounts, mixed use accounts and offset accounts
This chapter applies for Income Tax purposes to the computation of trade profits and property income. References in the text to a ‘business’ should therefore be taken to include both trades and property businesses. The chapter does not apply for Corporation Tax purposes, where there are separate rules in the loan relationships legislation (see CFM11000).
S34 Income Tax (Trading and Other Income) Act 2005
General business accounts
Many businesses operate accounts with overdraft facilities where all banking transactions are put through a single account. Normally it is not practical to separate tranches of borrowings for different specific purposes, or to ascertain which tranche is paid back and which continues. In these circumstances the interest is an allowable deduction unless the proprietor’s capital account is overdrawn, see BIM45705 onwards.
Where the account is being used solely for business purposes, then the interest is an allowable deduction in the accounts. In addition, the interest is allowable even if the proprietor is also using the account as a private cheque account for drawings provided that the capital account of the proprietor is always in credit. This is because any borrowings will be funding business assets or providing working capital.
Offset accounts are those accounts that combine functions that historically were carried out using separate bank accounts - such as loans, savings accounts and current accounts. Interest is computed on the net borrowing from the bank.
If the borrowing element of an offset account was not wholly and exclusively for business purposes then an interest apportionment would be appropriate.
Using an offset account Mr and Mrs L borrowed £100,000 for the purchase of their own home. They then borrowed a further £250,000 to buy caravans to hire out. Both their salaries are paid into the account together with rents of £2,000 a month. They pay all of their private expenses from the account. A reasonable apportionment of the interest charge would have to be made between the private and trade purposes. This would have to take into account whether they are effectively withdrawing more from the trade than the profit and any capital they introduced.
It is likely that the balance of the offset account will fluctuate. There is guidance at EIM26260 and EIM26261 on the allocation of debt repayments in these sorts of circumstances.