The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:
Companies are usually taxed on interest in accordance with the loan relationship rules. These are covered in more detail in the Corporate debt ― overview guidance note.
For unincorporated businesses where profits are not calculated on the cash basis, interest is always revenue expenditure. Because this is a statutory provision, there is no need to consider whether interest payments are capital in nature.
Therefore, provided the loan is taken out for a business purpose and meets the ‘wholly or exclusively’ test, interest payments will be allowable expenses for tax purposes. See the Wholly and exclusively guidance note for general considerations of this principle.
There are different rules for unincorporated businesses where profits are calculated on the cash basis. See below.
Overdraft or long-term loan interest will be an allowable deduction where it is used for business purposes. For example, interest will be allowable if the loan is used to buy stock, pay staff wages or buy an asset to be used in the trade.
Where the loan is taken out for a ‘mixed’ purpose, being both business and personal use, only the business proportion of the interest is allowed. This is the case whether the loan is mixed purpose or the asset purchased is mixed purpose.
A bank is unlikely to provide a ‘mixed use’ loan. It will be provided solely for the purposes of the business according to their paperwork. However, the actual purpose must be considered, in accordance with general principles. For example, a loan which is used partly for funding the business and partly to make immediate ‘drawings’ would be mixed use, regardless of the fact that it was a business loan.
On the other hand, a loan used to purchase a car which is partially used for business purposes also needs apportioning, despite the fact that
Access this article and thousands of others like it free for 7 days with a trial of TolleyGuidance.
Read full article
Already a subscriber? Login