The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
The tax treatment of financing expenditure for companies is determined by the loan relationship rules. These are covered in more detail in the Corporate debt ― overview guidance note.
For unincorporated businesses, statutory provisions exist which treat interest expenses as revenue. As a consequence, there is no need to consider whether interest payments are capital in nature.
It should be noted that no deduction is allowed for the repayment of the capital part of the loan itself.
Provided a loan is arranged for business purposes and meets the ‘wholly or exclusively’ test, interest payments arising from the loan will be allowable expenses for tax purposes. See the Wholly and exclusively guidance note for general considerations of this principle.
Overdraft or long-term loan interest will also 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.
In practice, a bank is unlikely to provide a ‘mixed use’ loan. It will be provided solely for the purposes of the business according to the terms of the loan agreement. However, the actual purpose must be considered for tax purposes, 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 arranged with the bank as a business loan.
On the other hand, the interest arising on a loan used to purchase a car which is partially used for business purposes also needs apportioning, despite the fact that it may be a personal finance contract.
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