A sole trader has taken out a personal loan to pay off non-business-related debts. The loan has terms which allow any amount to be repaid at any time.
The sole trader now argues that if he invests say £1000 in the business (by purchasing computer equipment), this is money which, had he not invested in the business, he would have used to repay £1000 of the loan saving interest on that sum. Consequently, the interest on that portion of the loan should be considered a business expense for tax purposes since that £1000 portion of the loan is now being used exclusively for business.
Does this argument, that investments in the business are essentially funded by means of a portion of the loan, hold water? This would also mean that any subsequent investments in the business could also be taken to increase the portion of the loan which is considered to be for business purposes, so over time the portion of the loan attributable to business would increase.
It is clear that this would not make sense to day-to-day expenditure, but the argument seems somewhat attractive for investments into the business such as purchase of equipment and long term business assets.
Is this allocation of portions of the existing loan to business investments likely to be acceptable to HMRC?