BIM62201 - Moneylenders: whether a trade

Not everybody who makes loans is carrying on a trade of moneylending. Lending money at interest is normally an investment and any interest received is taxable under Case III of Schedule D. For companies, this income will be taxed under Case III as loan relationship credits.

Whether the making of loans amounts to trade is essentially a question of fact and there has to be sufficient evidence of trading to displace the investment presumption. The most useful test in this context is that set out in CIR v Livingstone and Others [1926] 11TC538.(page 452).

`… whether the operations involved.... are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made'.

So the degree of organisation is important. To see whether a trade exists or not, it is necessary to compare the way in which advances are made, repayments collected and documents produced with the way a bank or finance house would organise these activities. A commercial lender issues documents detailing the amount lent, interest and repayment terms and what will happen in case of default. A commercial lender will also collect payments systematically and will actively pursue late payers, for example by using debt collection agencies and lawyers.

The number of lending transactions is also significant. A commercial money lender normally has a substantial number of loans to different borrowers on the books. This ensures that profits on performing loans can cover losses on non-performing loans.

Further guidance can be found as to what sort of organisation might be involved in the description of the appellant's moneylending business at pages 313-315 in the case of Monthly Salaries Loan Co Ltd v Furlong [1962] 40TC313.

Another useful pointer in considering if someone who makes loans is trading as a moneylender is whether a licence under the Consumer Credit Act 1974 is held. Section 21 of this act requires anyone who is carrying on a consumer credit business to be licensed. A consumer credit business is essentially any business so far as it relates to the provision of credit below £15,000 to individuals.

The Consumer Credit Act regulates the terms and conditions under which loans of £25,000 and less can be offered. Where a business only lends amounts greater than £25,000 agreements are not regulated under this Act and a licence is not needed.

For lending of money as part of, or ancillary to, another trade, see BIM40800 onwards.