INTEREST - 06.07.2006

Writing a cheque from your offset account

Funding

Tax deduction. Interest is allowable as a deduction in computing business profits or losses if it is incurred wholly and exclusively for the purposes of the business.

This will be the case where the borrowed money is used to finance the acquisition of business assets, such as plant and machinery or property, or to provide working capital for the business. The interest is then incurred wholly and exclusively for the purposes of the business. The Taxman’s Business Income Manual is a useful source of reference in this regard.

Rule of thumb. Whether or not interest is allowable as a deduction depends on the use of the borrowed funds during the relevant accounting period. This may remain the same throughout the life of the loan or it may change.

Funding the business. A business needs funding. A proprietor can do this by introducing into the business money from savings or assets which are already personally owned. Or the funds can be provided by borrowing money. Once the business is up and running, it may generate cash to meet any new funding needs or to repay old loans.

Ordinary accounts. Many businesses operate accounts with overdraft facilities where all transactions are put through a single account. Normally it is not practicable to separate borrowings for different purposes or to ascertain which tranche has been paid back and which continues. Where the account is solely for business purposes, then all the interest paid is an allowable deduction in the accounts.

Offset account

Recap. Offset accounts are those accounts that combine functions which historically were carried out using separate bank accounts - such as loans, savings accounts and current accounts. Interest is calculated on the net borrowing from the bank

In this case. If the borrowing element for an offset account is not wholly and exclusively for a business purpose then an interest apportionment would be appropriate. However, the Taxman does allow you to treat any capital repayments of the mortgage liability as reducing the private element first.

Ensuring a tax deduction

Tip 1. Don’t bring individual business transactions into your offset account facility. It’s best to write a cheque from your private account to the business account for a specific amount and use that to fund the business. This way you’ll maximise your interest claim and make it easier to calculate.

Tip 2. Pay the calculated interest figure from the business account over to your offset account to keep saving interest on your other borrowings. But it’s OK if your business can’t afford to do this.

Trap. If the mortgage account within your offset facility drops to a level below the loan to your business you will be deemed to have permanently repaid part of the loan. This means a permanent loss on interest relief on the amount repaid.

Tip 3. In your offset account, always keep a mortgage amount outstanding equivalent to the loan to your business - plus a buffer to take care of any miscalculations, e.g. keep a £40,000 mortgage to cover a £30,000 loan to your company.