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HMRC internal manual

Corporate Finance Manual

Loan relationships: trading credits and debits

What is a loan relationship held for the purpose of a trade?

Debtor relationships

A company will have a trading loan relationship, as a borrower, if it entered into the loan relationship because of its trade. So, for example, a loan taken out to purchase machinery for a manufacturing trade, or to finance an expansion of its trade, will be a trading loan relationship.

Creditor relationships

However, a company will only have trading loan relationships as a lender if it is party to a creditor relationship in the course of activities ‘forming an integral part of the trade’ (CTA09/S298). This will usually only apply to companies such as banks, insurers and financial traders. The meaning of ‘integral part of the trade’ is discussed at BIM40805. This was the main point at issue in Nuclear Electric plc v Bradley 68TC670 and this case contains useful pointers to consider.

Nature of debits and credits

Whilst a company can enter into a loan relationship with a particular intention in mind, it is the nature of the debits and credits as they are incurred or arise that determine how they are brought into account. For example, if a company with a restaurant trade takes out a £100,000 loan with the intention of using the full amount of the funds to refit restaurant premises, all the debits for interest expenses incurred on the funds drawn down would be for the purposes of the trade. However, if at a later date half of the funds are applied for a non-trade purpose, for example to purchase shares to hold as an investment, the interest debits relating to that non-trade purpose would treated as non-trading loan relationships debits from that date. Although the company originally intended that all of the loan would be used for a trade purpose when the funds actually were used part were for a trading purpose and part for a non-trade purpose.

Trading credits and debits

CTA09/S297 provides that debits and credits arising from a trading loan relationship for an accounting period, are

  • treated as receipts and expenses of the trade, and
  • taken into account in computing profits or losses of the trade for that period.

S297(4) makes it clear that the loan relationships legislation overrides CTA09/S53 and S54, so that any debit may be deducted in the computation of trading profits, regardless of whether it relates to capital or income or would otherwise be disallowed by CTA09/S54 (wholly and exclusively).