B2.437 Finance—incidental costs of raising and repaying
The deductibility of expenditure incurred in connection with financing the business depends upon the nature of the finance being raised. Where that finance is what the business needs to fund its day-to-day trading activities, that is its short term or circulating capital and the costs attributable to it are deductible. Where the finance represents the permanent or long-term capital of the business the expenditure is not deductible (see further B2.436). For companies, the deductibility of interest should be considered with regard to the loan relationship provisions (see Division D1.7).
In Ascot Gas Water Heaters Ltd 1, the company purchased its raw materials on nine months' credit. Its supplier reduced the credit period and sought a guarantee of the outstanding indebtedness. The company obtained the guarantee and had to pay a fee to the guarantor. At the same time, to provide capital for the expansion of the business the company borrowed £150,000, secured by an issue of guaranteed First Mortgage Debenture Stock, repayable in 15 years. The company paid a second guarantee fee in respect of the debenture stock. The first guarantee fee was allowed as revenue expenditure but the latter was not.
In Texas Land and Mortgage Co Ltd 2, the company raised money through the issue of debentures for lending or in the course of its mortgage business at a higher rate of interest. Commissions and fees incurred on placing the debentures, legal expenses, printing, postage and advertising expenditure and stamp duty were all