Interest is part of the fee

The taxpayer a firm of solicitors was in dispute with HMRC over the treatment of interest received on clients’ accounts: should it be considered as interest or trading income?

The firm originally submitted the return under appeal claiming to offset trading losses for the year against interest for the year. It later resubmitted the return claiming to offset trading losses incurred in earlier years against the interest.

HMRC rejected the resubmitted return claiming the original was correct specifically that the interest should be taxed as interest not as trading income.

The First-tier Tribunal judge concluded that the interest was in reality earned in the course of the solicitors’ trading. It was not interest on money set aside to meet future liabilities.

The interest was understood between the parties concerned to form part of the solicitor’s fee.

The interest was trading income...