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<b>Any Answers:</b> Incidental costs of finance. By Paula Tallon

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13th Feb 2006
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Paula Tallon, director of direct tax with Chiltern responds to accountants' queries.

Q: My client is refinancing a loan and in the terms of the original loan there is a charge payable to the lender. Is this cost part of the incidental costs of finance so that relief will be available?

A: The first question is whether your client is an individual or a company as the rules are very different. If your client is a company the payment is dealt with under the loan relationship provisions. Section 84(3) and (4) FA 1996 deals with the expense which are allowable as debits. Section 84(3)(c) covers payments under a loan relationship or a related transaction. HMRC's Corporate Finance manual (5210) gives an example of an early redemption penalty. So if your client is a company the penalty will be allowed as a debit under the loan relationship provisions.

However if your client is an individual the rules are not the same. Section 58 ITTOIA 2005 deals with the incidental costs of raising finance. Section 58(4) lists out expenses which are not deductible and in particular subsection (c) states that 'the cost of repaying a loan or loan stock so far as its attributable to its being repayable at a premium'. HMRC's Business Income Manual (45820) confirms that 'break charges' are not deductible. So in order to obtain a deduction the payment would have to be allowed as revenue under general principles. This would be difficult to argue, so hopefully your client is a limited company!

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By John R
14th Jan 2010 19:07

Penalty interest now allowable for individuals?

Paula - do you agree that the Revenue now consider that in the majority of cases penalty interest is allowable for individuals? They seem to have updated the manual 45820 since you wrote your answer, in the light of the Kato Kagaku case (SPC598).

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