A lender and borrower be

There are a variety of circumstances where taxpayers can obtain tax relief on qualifying borrowings. Whilst the ability to obtain tax relief on your home mortgage is unfortunately long gone, tax relief is available in a number of business related situations, such as borrowing to lend to a trader or to invest in certain ‘close’ companies. A close company for this purpose is generally an owner managed type company where the business of the company is either trading or letting property to third parties.

The conditions are few but getting the structure right is critical as a recent case will demonstrate.

HMRC denied a claim for tax relief on bank interest paid by a taxpayer which had been used by his company to develop a property site because the borrowing had been structured using a personal overdraft.

The taxpayer owned land and formed a company to develop the site and run future trading activities. The development cost amounted to approximately £1 million. The taxpayer took out a personal overdraft facility of £1,045,000 and the bank’s overdraft facilities included ‘any other account that may be opened as a replacement or substitution for it’. The taxpayer’s intention was to provide the necessary funding for the company to develop the site and for the company to then reimburse the interest paid to the bank.

During the year ended 30 June 2005 the accounts of the company disclosed that ‘…during the year the company paid interest totalling £128,464 to the director…in respect of working capital loans provided to the company’. The company had not withheld tax from the interest payments and HMRC issued assessments to the company for it.

The taxpayer stated that the £128,464 was not income but a reimbursement by the company of overdraft interest paid personally by him. Assessments were raised by HMRC in respect of the interest income omitted from the tax return.

HMRC argued that relief could not be given in respect of interest incurred (which would have cancelled out the reimbursement received) by overdrawing an account. This was because the legislation stated:

‘Relief is not to be given for interest on a debt incurred –

(a) by overdrawing an account, or

(b) by debiting the account of any person as the holder of a credit card or under similar arrangements’.

Whilst the Tribunal had sympathy for the taxpayer, the legislation was clear and the appeal was dismissed.