Loan taken out by sole trader

payrollpro Registered, FMAAT Posts: 427 Dedicated contributor 🌟 🐡 🌟
I have a question about a new sole trader and a loan taken out to provide the initial start up capital.

We know that interest paid on business loans is allowable and that interest charges on personal loans is not, however for a sole trader there is not such a clear dividing line between the person and the business.

In this case the client has borrowed money right at the start of the trading and used it to ensure the business can make payments, particularly his drawings, in the period till business income can truly meet its own needs. The funds appear to have been used to pay some true business costs so I am in a quandry.

The HMRC guidelines, SEFN8 and 9 are not particularly helpful and the EIM is ambiguous in my view because they both seem to assume there is a hard and fast dividing line between personal and business loans and I don't think that exists for sole traders.

Any ideas?



  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 πŸŽ† 🐘 πŸŽ†
    My gut feeling is to Apportion it. Because he is the business, I don't think it is possible to argue that his drawings are business - he needs that money to live on. Much as I would like to try and claim all of it, I think this is the line HMRC would take and off the top of my head, I can't think of a reasonable argument.

    The share of the interest that relates to definite business expenses I would definitely allow.
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