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Have I imagined a rule?

Costs of obtaining initial finance v renewing finance

Didn't find your answer?

Hi all

I could have sworn way back when I was newly minted there was a rule that said the amount paid to a mortgage broker when you first took out a loan was not allowable, as it related to obtaining finance and so wasn't revenue, compared to when you renewed the loan later when it was allowable as it was for existing finance.  After a debate with a younger colleague I can't find hide nor hair of the rule... all finance costs appear to be allowable (subject to the 25/75 split for 19/20).

Now before anyone gets upset, I haven't had cause to (try and) enact the rule in a long time, in fact I think the only time I have ever done it is in an exam (where I had it in my head as one of the 'classic tricks' to see if you could tell the difference between new and existing finance, like the new/existing knowledge rule).  So no clients have been harmed in the making of my delusion.  And obviously I now am corrected and know for future.

But for the sake of my sanity, is there a rule in another part of tax I could be thinking of?  Or have I just straight up made up a rule?

Thanks all...

Replies (18)

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By Tax Dragon
02nd Jun 2020 07:54

IIRC HMRC manuals use the example of legal fees. Fees for a new lease, capital; fees for maintaining a lease, revenue.

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JCACE
By jcace
02nd Jun 2020 08:51

Per PIM:
Incidental costs incurred in obtaining loan finance for a rental business are generally deductible in computing rental business profits provided they relate wholly and exclusively to property let out on a commercial basis. These costs include loan fees, commissions, guarantee fees and fees in connection with the security of a loan.

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By Justin Bryant
02nd Jun 2020 09:21

Either you imagined it or you have been reading too many nonsense comments from TD, WP etc. It is no more non-deductible as capital than the interest payments are.

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Replying to Justin Bryant:
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By Tax Dragon
02nd Jun 2020 09:26

I appear to be the only one addressing the OP's question ("is there a rule in another part of tax I could be thinking of?")

I may be wide of the mark, but at least I am addressing the question.

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Replying to Tax Dragon:
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By Justin Bryant
02nd Jun 2020 09:51

I see. You should have made yourself a bit clearer to avoid ridicule.

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Replying to Justin Bryant:
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By Tax Dragon
02nd Jun 2020 09:59

I'll try to remember to say "OP, I hope you don't find this ridiculous, but I am addressing your question" at the start of future replies.

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By whitevanman
02nd Jun 2020 09:29

Loan relationships rules were brought in round about 2002 and one of the fundamental changes was the scrapping of the distinction between Capital and Revenue. You would have to go back before then to find the rules to which you refer (yes, they did exist) and I am not sure whether the archive on Gov.uk contains such material.

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Replying to whitevanman:
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By Tax Dragon
02nd Jun 2020 09:37

That's companies. This (I think) is an individual.

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Replying to Tax Dragon:
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By whitevanman
02nd Jun 2020 13:08

Like you I was simply answering the question. Pre LR, there was no difference in the treatment of interest and other charges whether for companies or individuals. LR rules significantly changed that for companies. So the answer is that there used to be a "rule" of the type referred to by the OP. However, one may have to look long and hard to find when it changed because LR, for example, came in in 2002(ish) which is 18 years ago (and counting).

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Replying to whitevanman:
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By whitevanman
02nd Jun 2020 13:23

Incidentally, a quick look at the HMRC Business Income Manual at BIM45800 et seq refers to the statutory rule that now allows relief for costs of raising loan finance which would not otherwise have been allowable (for those outside LR).
The rule is in ITEPA 2005 but I doubt it was introduced that long ago. I would guess at closer to 2010 but it is only a guess. The guidance is silent about when it came in but the history of the legislation should be easy enough to trace if you are bored. Again makes clear that the OP was NOT making it up or imagining it.

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Replying to whitevanman:
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By Tax Dragon
02nd Jun 2020 14:05

whitevanman wrote:

Incidentally...

That's not incidentally.... that's answering the question!

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Replying to whitevanman:
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By Tax Dragon
02nd Jun 2020 14:08

Incidentally, was the tax formerly known as Schedule A rewritten in 2006, or was that one of Mum's tall tales? Would that be when the change happened?

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Replying to Tax Dragon:
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By whitevanman
02nd Jun 2020 21:36

I could not really say. I doubt the change to the rules on finance costs was directly linked to the re-writing of Sch A as such because the change applies to business income generally.
There has been a pattern, over many years, of bringing in a measure for companies and refining the rules before extending them to individuals etc. Testing the water as it were. This is another area where that happened and as far as I can recall, it was later than 2005 before they reached a settled position for companies. As I said, my guess is the change to the 2005 Act would have been made somewhere around 2010.

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By ireallyshouldknowthisbut
02nd Jun 2020 10:09

Are you maybe thinking about survey costs?

Full survey costs to BUY a house would be considered capital on acquisition as part of checking the house you are about to buy is not held up with duck tape and pollyfilla.

Survey costs to keep a lender happy (eg on refinance) would be a revenue expense. Lenders often only do 'desktop' surveys these days and its buried in their fees rather than a specific item.

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Hallerud at Easter
By DJKL
02nd Jun 2020 13:29

If you can wait until I next pop into my office (late today/tomorrow) to collect the post I can check my really dated Tilley's Revenue Law from circa 1980 which I do recall covers allowable expenses and capital/revenue issues re same at some length- the reason I have retained it all these years, and still sometimes look at it, is for its summary analysis of relevant case law on a topic by topic basis(I used to also have a Pinson's Revenue Law from the 1970s which came from my father's firm, but that one has over the years walked)

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By Dib
02nd Jun 2020 15:29

The incidental costs of raising loan finance for a business or investment company have been allowable for ages. I recall the provision back in ICTA 1970 but can't remember where it was. It did become s77 ICTA 1988 then got split for income tax purposes and corporation tax purposes (ITTOIA and CTA 2009).

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Quack
By Constantly Confused
02nd Jun 2020 16:02

I'm touched by all your replies and how much you all wanted to help me, however I rather suspect Tax Dragon might have nailed it in reply one...

I wonder if I am thinking of leases... that would fit the muddled way my brain sometimes works...

However, if anyone DOES want to find an old rule that matches my initial thought exactly I'd be perfectly happy to pretend that was the one I was thinking of all along :)

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Hallerud at Easter
By DJKL
02nd Jun 2020 17:43

Having now consulted my old textbook , Tiley Revenue Law, 3rd edition, 1981, I have spotted a glimmer as to why say broker fees might not be deductible re particularly rental income; I have not read up on aspects re deduction for trade yet and will be getting fed shortly so may be delayed.

Schedule A only permitted deductions under TA 1970, s 72, which was a pretty prescriptive list, see below:

http://www.legislation.gov.uk/ukpga/1970/10/section/72/enacted

Interest was NOT a deductible expenses against rental income, it was instead a claim against rental income, and "The interest may only be set against rental income and not against general income. Any excess interest may be rolled forward to be set off against rental income from later years" FA 1974, Sch 1, para 7.

"Relief under section 75 of the [1972 c. 41.] Finance Act 1972 for interest eligible for it by virtue of Part I of Schedule 9 to that Act in a case where the land, caravan or house boat referred to in it falls under paragraph 4(1)(b) above shall be given only against income from the letting of that or any other land, caravan or house boat, but may, if and to the extent that such income for the year of assessment is insufficient, be given against such income for the following year, and so on, provided the first-mentioned land, caravan or house boat continues to fall under that paragraph."

https://www.legislation.gov.uk/ukpga/1974/30/schedule/1/enacted

So we have express allowability of INTEREST.

We now need to consider what is interest, because it is only interest that here may be deducted.

Tilley says "There is no statutory definition of interest. In Bennett v Ogston, Rowlatt J defined it as "payment by time for the use of money" 1930 15 TC 374 at 379" Halsbury defines it as " the return or compensation for the use or retention by one person of a sum of money belonging to, or owed to, another"Halsbury's Laws of England (3rd Ed(, vol 27, para6"

I will therefore posit that as the broker fees are not covered by the restrictions of S72 above and as they are not "Interest", they could not , whether on first being drawn, or as replacement borrowing, have been relieved against Schedule A income.

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