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HMRC internal manual

Business Income Manual

Specific deductions - interest: Overdrawn capital account

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

The only certain way of ascertaining how much of an overdraft or loan has funded private expenditure is to look at each individual entry. This is usually impracticable and it is necessary to use a reasonable basis as an approximation.

An overdrawn capital account shown in the balance sheet is no more than an indication that a loan or overdraft is being used to fund private drawings. You must be able to demonstrate that it is private drawings, which have caused the account to become overdrawn, and that the overdrawn capital account has been funded by bank borrowings. You must look carefully at all of the components of the balance sheet to judge how the proprietor’s drawings have been funded.

These sorts of issues were considered in Silk v Fletcher [2000] SpC201 (with final figures being determined in SpC262). The Special Commissioner’s decision in SpC201 contains clear reasoning about the facts in that particular case to decide whether interest was paid wholly and exclusively for the purposes of the profession. See also BIM45715 and BIM45725.