Thousands of small businesses may not get Government tax relief

Thousands of small business owners who have received emergency loans from friends and family to prop up their businesses may not get tax relief from the Government if they don’t pull through, say leading tax and advisory firm, Blick Rothenberg.

Robert Pullen, tax partner at the firm said: “HMRC could take a dim view on such loan arrangements if the company does not survive. Business owners and their extended family who have taken this approach should therefore be very cautious in case it backfires.”

He added: “HMRC have always scrutinised claims for tax relief on loans which are not repaid. Such emergency loans, often termed “simple debt”, are usually exempt from capital gains tax. This means gains are not taxed but losses are not allowed either.”

Robert said: “a special relief is built into the legislation which allows a loss in this situation where the company is trading. Although this is helpful, HMRC have in the past attempted to deny relief if they consider there was little chance the company could be turned around at the time the loan was made – in their view this is “good money after bad” and therefore not allowable regardless of the legislation.”

“ Given the implications, business owners, and their extended family who may have stepped in to help, should be wary of HMRC taking this approach and should ensure they have sufficient evidence to back up any claim for a loss.”

Pullen added “We hope that HMRC will be lenient and recognise that many businesses were viable, but were disrupted by a once in a generation event – and therefore allow relief in the spirit of the times we live in.”

“A further opportunity can be missed even if the loss is allowed, as there is a difference between emergency funding given by way of loan or shares.”

Robert said: “in some situations, HMRC allow relief for losses against income – however this is only for share capital. A loan will only ever get capital gains tax relief. As there is scope for income tax relief, business owners should review their funding arrangements carefully to maximise their tax relief in line with the legislation.”