Mr Cautious and Mr Goforit are each intending to go into business. Coincidentally, they are considering exactly the same business with exactly the same capital requirements for initial purchase of stock, equipment and premises.
Mr Cautious carefully arranges a bank loan before he starts trading. By day one of his business, the money is in his business account, and he never needs to put a significant amount of personal capital into his business.
Mr Goforit is confident he can sort out a bank loan in a few weeks but meanwhile he’s keen to crack on with his business as quickly as possible. So he raids his piggy bank to fund the start-up costs. His confidence in his ability to blag the bank for a loan is well-founded: a month after he starts trading he gets a bank loan (coincidentally for exactly the same amount as Mr Cautious), pays it into the business bank account and withdraws his capital.
Spookily, the two businesses turn out to have exactly the same trading performance. So of course they pay the same amount of tax. Except that they don’t. Mr Goforit is mortified when he finds out that his tax bill – on exactly the same trading results, remember – is higher than that of Mr Cautious!
How come? The answer lies in HMRC’s revised guidance in their Business Income Manual at BIM45690.
It used to say (very sensibly) that interest on borrowings used to replace owner’s capital was deductible in computing profits. Since that is exactly what Mr Goforit’s loan was used for, it was HMRC’s former view that Mr Goforit was, as regards tax relief for interest, in exactly the same position as Mr Cautious. Which was a very sensible view to take. And it was the view which had been taken by HMRC for many years.
Far too sensible a view for the HMRC of 2026, it seems. The revised guidance focuses only on the immediate use of the money borrowed. To quote the new guidance:
‘The purpose of obtaining the funds was to facilitate a personal withdrawal of cash. In order for the interest on the loan to be an allowable deduction it must satisfy the wholly and exclusively test provided by [ITTOIA 2005 s 34].
As the funds are used for a non-business purpose they do not satisfy the test and the interest is not an allowable deduction.’
If this is not absurd enough, consider the position of Mr Penniless, whose business is, astonishingly, identical to that of Mr Cautious and Mr Goforit. He didn’t have the necessary in his piggy-bank, so his initial capital came from his wealthy civil partner Mr Loaded, whose loan he repaid when, like Mr Goforit, he sorted out bank finance. Because Mr Penniless was using the bank loan to repay an existing loan (albeit from his civil partner) rather than to withdraw capital, his bank interest will, like that of Mr Cautious, be tax-deductible!
More ridiculous still, if Mr Loaded and Mr Penniless were business partners, Mr Loaded’s repayment would be a repayment of capital account, and the same non-deductibility would arise as for Mr Goforit.
Someone at HMRC hasn’t thought this through. They should.
Mr Cautious and Mr Goforit are each intending to go into business. Coincidentally, they are considering exactly the same business with exactly the same capital requirements for initial purchase of stock, equipment and premises.
Mr Cautious carefully arranges a bank loan before he starts trading. By day one of his business, the money is in his business account, and he never needs to put a significant amount of personal capital into his business.
Mr Goforit is confident he can sort out a bank loan in a few weeks but meanwhile he’s keen to crack on with his business as quickly as possible. So he raids his piggy bank to fund the start-up costs. His confidence in his ability to blag the bank for a loan is well-founded: a month after he starts trading he gets a bank loan (coincidentally for exactly the same amount as Mr Cautious), pays it into the business bank account and withdraws his capital.
Spookily, the two businesses turn out to have exactly the same trading performance. So of course they pay the same amount of tax. Except that they don’t. Mr Goforit is mortified when he finds out that his tax bill – on exactly the same trading results, remember – is higher than that of Mr Cautious!
How come? The answer lies in HMRC’s revised guidance in their Business Income Manual at BIM45690.
It used to say (very sensibly) that interest on borrowings used to replace owner’s capital was deductible in computing profits. Since that is exactly what Mr Goforit’s loan was used for, it was HMRC’s former view that Mr Goforit was, as regards tax relief for interest, in exactly the same position as Mr Cautious. Which was a very sensible view to take. And it was the view which had been taken by HMRC for many years.
Far too sensible a view for the HMRC of 2026, it seems. The revised guidance focuses only on the immediate use of the money borrowed. To quote the new guidance:
‘The purpose of obtaining the funds was to facilitate a personal withdrawal of cash. In order for the interest on the loan to be an allowable deduction it must satisfy the wholly and exclusively test provided by [ITTOIA 2005 s 34].
As the funds are used for a non-business purpose they do not satisfy the test and the interest is not an allowable deduction.’
If this is not absurd enough, consider the position of Mr Penniless, whose business is, astonishingly, identical to that of Mr Cautious and Mr Goforit. He didn’t have the necessary in his piggy-bank, so his initial capital came from his wealthy civil partner Mr Loaded, whose loan he repaid when, like Mr Goforit, he sorted out bank finance. Because Mr Penniless was using the bank loan to repay an existing loan (albeit from his civil partner) rather than to withdraw capital, his bank interest will, like that of Mr Cautious, be tax-deductible!
More ridiculous still, if Mr Loaded and Mr Penniless were business partners, Mr Loaded’s repayment would be a repayment of capital account, and the same non-deductibility would arise as for Mr Goforit.
Someone at HMRC hasn’t thought this through. They should.
