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HMRC internal manual

Business Income Manual

Cash basis: expenses: interest payments and incidental costs of obtaining finance

S51A ITTOIA 2005, S57B ITTOIA 2005, S31E ITTOIA 2005In calculating the profits of a trade on the cash basis, there is a general rule that no deduction is allowed for interest paid on a loan.

There is express provision, however, to allow a deduction of up to £500 for interest and incidental costs of obtaining finance which would otherwise be disallowed either by the general rule or because it wasn’t expenditure incurred wholly and exclusively for the purposes of the trade. All cash borrowing for business purposes is covered by this provision.


Steve takes out a bank loan to buy a new computer to use both in the business and for private purposes. The business use proportion will be approximately 40%. Steve pays £600 in interest in the basis period for the tax year 2014-15. He can include a deduction of £500 for the interest paid in calculating his profits on the cash basis. It does not matter that the loan was not used wholly and exclusively for the purposes of the trade, no apportionment is required.

Interest on purchases

Payments of interest on purchases are not subject to the £500 limit, provided the purchase itself is an allowable expense, as this is not cash borrowing. For example, trade credit charged by suppliers of goods or services, interest charges for hire purchase or leasing of plant or machinery and credit card interest on allowable purchases are allowed in full. However, if the item purchased is used for both business and private purposes, only the proportion of interest related to the business usage is allowable.