When an investment is made in a capital asset that subsequently becomes valueless, the loss can normally be used to reduce future liabilities to Capital Gains Tax when a capital asset is sold at a profit.

There are also rules which permit trading expenses and losses to be set against other income for Income Tax (IT) purposes, reducing the IT liability.

When a businessman lent his father’s skip-hire business money that the latter was unable to repay, he claimed IT deductions for the resultant bad debts, which totalled more than £147,000.

The son argued that his father’s company was one ‘on whose survival my companies absolutely depend’.

HM Revenue and Customs rejected the claim on the ground that the loans were capital in nature. They were not expenditure ‘wholly and exclusively laid out for the purposes of the trade’ and thus could not be claimed as a deduction for IT purposes. The rejection was confirmed by the First-tier Tribunal and an appeal was made to the Upper Tribunal (UT).

In practice, the UT was unable to establish the existence or true amount of the loans made. Even so, since the man did not carry on the trade of money-lending and the sums were advanced as working capital, not as part of a trading transaction, the claim had to fail. The mere existence of a symbiotic relationship between the two businesses could not change the facts.