CFM40100 - Loan relationships: deemed loan

relationships: overview and summary

Contents
CFM40110 Overview

CFM40120 Money debts: summary

CFM40130 Investment funds and mutual arrangements: summary

CFM40140 Interest-like returns: summary

Relationships treated as loan relationships: Overview

CTA09/S302 defines a loan relationship as a money debt, that arises from a transaction for the lending
of money.
Certain types of financial arrangements, and the rights and payments made under those arrangements,
do not fall within this definition, but are nevertheless brought within the loan relationship rules by
CTA09/PT6.
Part 6 refers to these as ‘relationships treated as loan relationships’. For convenience, in the Corporate
Finance Manual we refer to these as ‘deemed loan relationships’. Broadly, these ‘deemed loan
relationships’ fall into three categories.
• ‘Money debts’ that do not ‘arise from the lending of money’ (Chapter 2 of Part 6 CFM40120.)
• Investments in certain types of investment fund and mutual arrangement (Chapters 3 to 5 of Part
6 CFM40130.)
• Arrangements that give an interest-like return (Chapters 2A and 6 to 11 CFM40140.)
In each case the legislation provides for the rules in CTA09/PT5 to apply to these ‘deemed loan
relationships’ as if they are loan relationships, and CTA09/S294(2) provides generally that references to
‘Part 5’ in the Tax Acts includes references to ‘Part 6’.
‘Non-lending relationships’
CTA09/PT6/CH2 sets out the rules for ‘relevant non-lending relationships’. These are money debts, but
they do not arise from the lending of money and hence do not come within the definition in Part 5.
Chapter 2 taxes two types of such money debt:
• those on which interest, exchange gains and losses and impairment losses arise; and
• discounts.

Interest-bearing debts
The most common example of such debts is a trade debt. Interest and profits (but not losses) from the
disposal of the right to receive interest, exchange gains and losses, and impairment losses on such debts
are taxable under CTA09/S479 as loan relationship credits and debits.
The impairment losses to which Chapter 2 applies are what used to be taxed as bad and doubtful trade
debts under ICTA88/S74(1)(j) for periods before 1 January 2005.
Discounts
Discount received on a money debt is taxable under CTA09/S480 as loan relationship credits. The rule
only applies to the creditor, not to the debtor, and does not apply to amounts brought into account as
trade receipts. Before 16 March 2005, discounts were taxable for Corporation Tax purposes under
Schedule D Case III.
The rules on money debts are explained in more detail at CFM41000.
Holdings in certain types of investment fund and mutual
arrangements
Certain types of investment may not be ‘money debts’, or arise from lending money, or the return they
provide may be described as a ‘dividend’ or a ‘bonus’ rather than as ‘interest’.
Investment funds
Special rules prevent a company avoiding the loan relationships rules where it holds debt securities
through the intermediary of certain types of investment funds - open-ended investment companies
(OEICs), unit trusts and offshore funds. In certain circumstances a company’s holdings in such types of
fund are treated as creditor loan relationships. CFM43000 gives more detail.
Guidance on the taxation of OEICs, unit trusts and offshore funds is to be found in the Company
Taxation Manual (CTM48000) and in the Savings and Investment Manual (SAIM6000).
Building societies and industrial and provident societies
CTA09/S498 brings dividends and interest payable by building societies into the loan relationships
regime so far as they would not otherwise be within it. Guidance on the taxation of building societies is
to be found in the Company Taxation Manual (CTM49000).
CTA09/S499 treats dividends, bonuses and other sums payable on shareholdings in industrial and
provident societies, and in agricultural or fishing co-operatives, held for the purposes of a trade or for
other purposes as if it were interest arising on a loan relationship held for that purpose. It does not treat
the shares themselves as a loan relationship other than to allow dividends etc on shares held for the
purposes of a trade to be treated as trading income.
Arrangements that give an interest-like return
Certain financial arrangements provide a return that is economically equivalent to interest, but in legal
form is not interest. The arrangements that are brought within the loan relationships rules by virtue of
Part 6 are as follows.
Disguised interest
Legislation introduced in FA 2009 provides for interest-like returns from transactions that are not loan
or treated as loans to be taxed under the loan relationships rules. This legislation is a successor to the
shares as debt rules (see below). See CFM42000.
Alternative finance arrangements
Alternative finance arrangements are Shari’a-compliant financial arrangements that provide an interest-
like return without paying interest, for example by means of the purchase and sale of commodities, or
by profit-sharing. Where such arrangements provide a return that economically amounts to interest,
CTA09/PT6/CH6 the loan relationships rules tax it as such. See CFM44000.
Shares with guaranteed returns, returns from partnerships, shares treated as
liabilities
Certain shares and certain holdings in partnerships give a return that is very similar to the return from
holding debt. The ‘shares as debt’ rules in CTA09/PT6/CH7 and partnership returns rules in
CTA/PT6/CH8 bring these within the loan relationships rules. See CFM45000. These rules are
superseded by the ‘disguised interest’ rules introduced by FA 2009 (see above), except for rules on
‘shares treated as liabilities’ which continue the effect of certain features of the ‘shares as debt rules’.
Manufactured interest and repos
Assets such as securities may be lent or transferred to another company under a ‘sale and repurchase’
(repo) arrangement, which equates in substance to making a loan to and receiving interest from the
other company. CTA09/PT6/CH9 and CH10 bring these arrangements within the loan relationships
rules. See CFM46000.
Investment life insurance contracts
Profits and gains from certain life insurance contracts held by companies are treated as deriving from a
loan relationship by virtue of CTA09/PT6/CH11. CFM47000 gives an overview of this, and see the
HMRC Insurance Policyholder Taxation Manual (IPTM) for full guidance.
CFM41000 - Deemed loan relationships: money
debts
Contents

CFM41010 Deemed loan relationships: money debts: overview

CFM41020 Deemed loan relationships: money debts other than discounts

CFM41030 Deemed loan relationships: money debts other than discounts: trade debts: impairment

Deemed loan relationships: money debts other than discounts: trade debts: restrictions on
CFM41040
write-down

Deemed loan relationships: money debts other than discounts: trade debts: use of fair value
CFM41050
accounting

CFM41060 Deemed loan relationships: trade debts: debt releases

CFM41070 Deemed loan relationships: trade debts: releases where debtor and creditor are connected

CFM41080 Deemed loan relationships: trade debts: releases between unconnected companies

Deemed loan relationships: money debts other than discounts: related transactions for the
CFM41090
disposal of interest rights

CFM41100 Deemed loan relationships: money debts: discounts

Deemed loan relationships: money debts: discounts: tax consequences within loan
CFM41110
relationships

Deemed loan relationships: money debts: extended definition includes foreign exchange
CFM41120
differences

CFM41130 Deemed loan relationships: money debts: certain foreign exchange differences are excluded

Relationships treated as loan relationships: overview

CTA09/S302 defines a loan relationship as
• a money debt, that
• arises from a transaction for the lending of money.
Money debts that do not involve the lending of money are referred to a ‘relevant non-lending
relationships’ (CTA09/PT6/CH2). The legislation deals separately with
• relevant non-lending relationships that do not involve discounts (CTA09/S479) - in summary, debts on which
interest, foreign exchange differences, and impairment losses arise, or trade debts which are released;
• relevant non-lending relationships that do involve discounts (CTA09/S480).
CTA09/S481 applies the loan relationships rules in CTA09/PT5 to these relevant non-lending
relationships.
CFM41020 to CFM41090 explains the rules on money debts other than discounts.
CFM41100 to CFM41130 explains the rules on discounts.
Excluded money debts
Money debts taxable under CTA09/PT5/CH2 do not include amounts taxable under the corporation tax
rules on derivative contracts rules (CFM50000) or intangible assets (CIRD10000).
Extended definition of ‘money debt’ relating to exchange gains and losses
CTA098/S483 treats currency and certain kinds of provisions as money debts, as far as exchange
differences are concerned. But certain exchange differences are specifically excluded. See CFM41130
for more details.
Interest includes imputed interest
CTA09/S484 ensures that amounts imputed on a money debt under the transfer pricing rules in
ICTA88/SCH28AA (for example, where a UK company is required to impute a market rate of interest
on a low interest or interest-free loan it makes to a connected company) is treated as interest under
CTA09/PT6/CH2 (CFM41020). See INTM51600 for more on the transfer pricing rules. (CTA09/S444
deals with imputed interest on a loan relationship - CFM38140).
For periods beginning before 1 April 2004, this rule covered interest, but not any other profit, gain or
loss, or charge or expense, imputed by ICTA88/SCH28AA.
No separate rules for discounts
For accounting periods beginning before 15 March 2005, discounts not arising from loan relationships
were taxable for CT purposes under Case III of Schedule D (ICTA88/S18(3A). This was repealed for
accounting periods beginning after 15 March 2005.
Money debts other than discounts treated as loan relationships
CTA09/S479 applies where a company is a creditor or debtor in relation to a money debt that did not
arise from the lending of money and
• interest,
• foreign exchange gains and losses, or
• impairment losses, or their reversal, in respect of a ‘business payment’,
arise on the debt, or
• the money debt (if it arises from a trade or property business) is released by the creditor, and the release occurs
on or after 22 April 2009.
A debt is a ‘relevant non-lending relationship’ if it falls into one or more of these categories.
Examples of money debts that will be ‘relevant non-lending relationships’ are:
• interest-bearing trade debts,
• judgement debts (if they carry statutory or other interest),
• deferred consideration, for example on land or share sales, if it carries interest or if exchange differences arise,
and
• tax debts and amounts of tax repayments due (including interest under TMA70/S87 and S87A but not interest
under S86).
CTA09/S481(3) provides that the only amounts brought into account under on such relationships are
• interest
• exchange gains and losses
• profits, but not losses, on a related transaction for the transfer of the right to receive interest.
• impairment losses on ‘business payments and the reversal of those impairment losses (see CFM41030) or
• a release debit brought into account by the creditor, or a profit brought into account by the debtor, where a
trade or property business debt is released (see CFM41060).
Where CTA09/S481 provides for the loan relationships rules to apply to a particular credit or debit, all
of the relevant computational provisions - for example, the connected party rules - will have effect
where they are relevant.
Example: application of loan relationships rules
An agricultural co-operative (structured as a company) carries on a mutual trade, so that profits or losses
from this business are not within the charge to corporation tax. As part of the mutual business, the
company incurs a debt to a supplier, on which it is charged interest. The debt is therefore a relevant non-
lending relationship, and relief for the interest falls to be given under the loan relationships rules (and
only under these rules).
Since, however, the company has entered into the relationship in connection with part of its business
that is not within the charge to CT, CTA09/S442(2) applies. For the purposes of CTA09/S441 (the
‘unallowable purposes’ rule) this is not among the business or commercial purposes of the company,
and the interest debit is consequently disallowable.
Trade 'bad debts' are within loan relationships rules
‘Business payments’ are payments that would be taken into account as a receipt of a trade, or a UK or
overseas property business carried on by the company. If a debt arises because such a business payment
has not been made, any impairment loss sustained by the creditor is dealt with under the loan
relationships rules. The same applies if the creditor wholly or partly reverses the impairment provision,
and brings a credit into account.
This rule applies to periods of account beginning on or after 1 January 2005 and has the effect of
applying the loan relationships regime (including the connected party rules) to ‘bad debts’ arising in a
trade or a property business. The previous legislation at ICTA88/S74(1)(j) was repealed for periods of
account beginning on or after 1 January 2005.
CFM41040 has more on impairment losses arising on trade debts within the loan relationships rules.
Restrictions on writing down debt
Under CTA09/S324, a company that accounts for a creditor loan relationship on an amortised cost basis
can only claim a debit from a write-down of a debt where this arises from
• an impairment loss, or
• a release by the company of all or part of the debt.
It cannot claim a debit in respect of a revaluation. This applies both to loan relationships and to money
debts treated as loan relationships by CTA09/PT6. It also applies to all such debts, not merely those
where the debtor and creditor are connected companies.
This means that companies cannot get relief for a general bad debt provision, or for writing down a debt
to the lower of cost or market value, even if such a debit features in the company’s accounts.
If an amount is disallowed for tax purposes, because it is
• a revaluation of a debt that is not an impairment loss, or
• a general bad debt provision that was, in a period of account beginning before 1 January 2005,
not permitted under ICTA88/S74(1)(j), or
• a revaluation of a debt that was, in a period of account beginning before 1 January 2005,
disallowed by FA96/S85(2)(c)
a credit arising from reversal of the amount will not be taxable.
See CFM41050 where fair value accounting is used.
Use of fair value accounting
The restriction on writing down trade debts described in CFM41040 does not apply where fair value
accounting is used. ‘Fair value accounting’ includes not only the use of mark to market accounting
under ‘old UK GAAP’, but the situation where the money debt is the hedged item in a fair value hedge
(CFM27000). Neither does it affect exchange gains or losses.
Fair value hedge example
A company supplying fitted kitchens offers credit terms to retail customers. Under the credit agreement,
the customer pays interest at a fixed rate. In order to hedge changes in the fair value of its portfolio of
credit agreements arising from fluctuations in interest rates, the company enters into an interest rate
swap, effectively converting the debt from fixed to floating rate. It designates a fair value hedge of
interest rate risk, with the credit agreement portfolio as the hedged item and the swap as the hedging
instrument.
The effect of using hedge accounting is that changes in the fair value of the portfolio, in so far as they
relate to interest rate changes, are taken to profit and loss account. But no adjustment is made to the fair
value of the portfolio for any other reason, for example if the credit status of the customers changes.
Arguably, the carrying value of the money debts in the company’s balance sheet is not ‘fair value’ as
defined in CTA09/S313. HMRC take the view, however, that company is using fair value accounting
for the asset. If interest rates rise and amounts are debited to profit and loss as the fair value of the asset
decreases, CTA09/S324 does not preclude the company from obtaining relief.
Trade debt releases come within loan relationships
FA09 expanded the provisions for relevant non-lending relationships so that, where a debt arising from
a trade or a UK or overseas property business is released, the ‘profit’ brought into account by a debtor
company is taxed under the loan relationships rules. The change applies to debt releases occurring on or
after 22 April 2009.
It also puts beyond doubt that, where a creditor company releases a trade or property business debt, the
resultant debit falls within loan relationships rules. For releases before 22 April 2009, HMRC’s view
was that the provision in CTA09/S481(3)(d) relating to impairment losses also applied to release debits.
‘Release’, in this context, means either a formal release which the creditor executes by deed or a legally
binding agreement between the debtor and creditor that cancels the debt. It also covers any case in
which, either because of the passage of time or for some other reason, a debt is no longer legally
enforceable and the debtor accordingly brings in an accounts credit (see BIM40255). The provisions do
not, however, apply if a creditor merely neglects to pursue a debt, either by oversight or intention.
CFM41070 gives guidance on the tax consequences of debt releases where the creditor and debtor are
connected companies, and CFM41080 deals with the situation where they are not connected.
Tax treatment where trade debts between connected companies
are released
Releases of trade and property business debts are most likely to be encountered between companies
within a group, for example as part of a group restructuring. Where the creditor and debtor are
connected companies, the connected party rules will apply to the release. This means that the release
debit in the creditor’s accounts will not be allowable, because of CTA09/S354. Similarly, the credit in
the debtor company’s accounts will not be taxable, since CTA09/S358 applies.
Since the release is, for both parties, dealt with under loan relationships, the priority rule in
CTA09/S464 means that the creditor’s loss cannot be claimed, nor the debtor’s profit taxed, under the
normal provisions for trading income. Nor can the credit in the debtor’s accounts be taxed under
CTA09/S94 (debts incurred and later released).
Trade debts or loans between companies within a group may not uncommonly be released when either
the debtor or the creditor company (or both) is dormant, as part of a ‘tidying-up’ exercise to enable
dormant companies to be struck off. If this is all that happens, HMRC would take the view that the
recording of an accounts profit - which is not taxed - in a dormant debtor company does not result in
that company starting to carry on a business, and therefore does not start an accounting period under
CTA09/S9.
Where the creditor and debtor are not connected companies, see CFM41080.
Trade debt release where connected party rules do not apply
Where a creditor company releases a trade (or property business) debt owed by a person other than a
connected company, the effect of applying the loan relationships rules will generally be that the debit
shown in the company’s accounts is allowable for tax purposes. Conversely, for a debtor company, a
credit that comes about in corresponding circumstances will in most cases be taxable.
But the exclusions in CTA09/S322 that apply where a loan relationship is released also apply to trade
debts. Thus if the debt is released as part of a statutory insolvency arrangement, or the debtor issues
shares to the creditor in consideration of the release, no credit is brought into account.
Example
Maria trades on her own account as a management consultant. She employs an assistant, Winston. In
2007, she formed a limited company, in which she is the majority shareholder, to undertake particular
consultancy projects. From time to time, Winston undertakes work for the company, for which Maria
invoices the company at a commercial rate. In 2010, because of the company’s cash flow problems,
Maria formally releases the company from the balance of £30,000 owing on these invoices.
The company’s accounts show a credit in respect of the debt release. Although Maria controls the
company, CTA09/S358 does not apply - it will only apply where there is a ‘connected companies
relationship’, and not where the creditor is a non-corporate. So the credit is taxable.
Maria may be able to claim as a trading expense for her ‘loss’, but will need to demonstrate that it was
incurred wholly and exclusively for her sole trade.
Related transactions for the disposal of interest rights
F(No.2)A 2005 inserted rules on related transactions taking place on or after 16 March 2005.
Avoidance disclosures had indicated that companies were entering into transactions to transfer the rights
to interest shortly before payment so that instead of receiving interest they received a sum equal to the
value of the interest. Since such sums may not be interest it was argued that they were not within the
scope of the rules on money debts.
Where a company has a money debt to which CTA09/S479 applies (that is, money debts on which
interest, exchange differences and impairments losses arise), under CTA09/S481(5) any profit from the
disposal of its interest rights is bought into charge as a loan relationship credit. CTA09/S481(8) applies
the same rule for sales of rights to discount.
The rules apply:
• in the case of a money debt on which interest is payable, to profits (but not losses) arising to the
company from any related transaction in respect of the right to receive interest
• in the case of a money debt on which discount arises, to profits (but not losses) arising to the
company from any related transaction.
‘Related transaction’ takes its meaning from CTA09/S304 as any disposal (in whole or part) of rights or
liabilities under the relationship.
Discount
Discounts (and premiums) are alternatives to interest in rewarding investors for lending money.
Although not specifically mentioned, they come within the loan relationships legislation as ‘profits,
gains and losses’ arising from a company’s loan relationships.
Discounts taxed as money debts
CTA09/S480 brings certain types of discounts within the rules on money debts, where:
• the company is a creditor (and so the money debt is an asset)
• the money debt is one from which a discount arises.
The rule applies from 16 March 2005, and transitional rules exclude from the provision any discount on
a money debt which accrued before 16 March 2005.
CTA09/S480 does not treat the debtor as party to a loan relationship. So there will normally be no loan
relationship debit corresponding to the creditor’s credit.
CTA09/S480(5) provides that a particular instance of where a discount arises is where
• a company disposes of property for a deferred consideration,
• that deferred consideration is greater than the amount that would have been paid for the property if the price
had been paid at the time of disposal and
• the difference, the excess, represents a return on an investment of money at interest
This rule ensures that where compensation is paid to the vendor for being out of their money in the form
of an increased amount of sale price this increase is treated as a discount for the purposes of
CTA09/PT6/CH2.
Apart from this specific case, ‘discount’ takes its normal meaning. If, for instance, a bill of exchange
were acquired by a company at less than face value then any subsequent profit could be taxed under
CTA09/PT6/CH2.
Discounts not within section 480
CTA09/S480 will not apply where profits are brought into account as income under some other
provision, for example where
• the company brings the discount into account as alternative finance return) (CFM43000),
• the money debt is brought into account as a trading receipt, or
• the money debt arises from the disposal of property which is a loan relationship or a derivative contract.
This condition is further qualified for certain disposals made on or after 22 March 2006. These are
defined in CTA09/S480(3) as disposals where CTA09/S340 or CTA09/S625 apply (rules on the use of
fair value accounting in certain cases - see (CFM34000 and CFM53000), (or would apply but for the
exceptions in CTA09/S341 and CTA09/S628 respectively) or where the whole of the consideration is
brought into account for the purposes of the loan relationships regime or the derivative contracts rules.
Tax consequences where a discount is treated as a money debt
Where a company is party to a money debt that meets the conditions in CTA09/S480 it is deemed to
have a loan relationship but only in relation to the matters specified in CTA09/S481(5). These matters
are:
• any discount arising to the company from the money debt
• any impairment (or reversal of impairment) arising to the company in respect of the discount.
CTA09/S482(2) provides that where discount is brought into account for the purposes of CTA09/PT6
the deemed creditor loan relationship must be accounted for, for tax purposes, on an amortised cost
basis of accounting. This ensures that the discount is brought into account over the life of the debt rather
than deferred until it is realised.
Example
A company sells shares worth £100 for £105. The purchase consideration is agreed at 105 payable by
the purchaser in a year’s time.
CTA09/S480 will apply to the difference of £5 between the consideration and value of the asset
because:
• there is a disposal for deferred consideration
• the consideration is in excess of the value of the property at the time of disposal
• the excess is in substance a return on a money debt.
The difference of £5 between the value of the shares and the deferred consideration paid is charged as a
loan relationship profit. This amount must be brought into account for tax purposes on an amortised cost
basis.
Had the property disposed of been a loan relationship then CTAS09/S479 would not apply. Instead the
full consideration of £105 would be brought into account in determining the profit on disposal of the
loan relationship. Similarly, if the company had been a financial trader such that the sale of the shares
represented a trade receipt, CTA09/S479 would not apply since the consideration of £105 would already
be charged to CT as a trade receipt.
Exchange gains and losses: amounts treated as money debts
Exchange gains and losses on money debts are brought into account under CTA09/PT5/CH2.
CTA09/S483 further provides that the following are treated as money debts under the loan relationships
rules:
• any currency held by the company;
• provisions for future liabilities as long as they relate to a trade, or a UK or overseas property business and
would otherwise be allowable under those rules;
• provisions for unearned premiums and unexpired risk reserves of insurance companies.

Example: exchange difference on trade debts

On 1 January Basker Ltd sells goods to an Italian firm for €15,000. At the time the goods are delivered
€15,000 is worth £10,000. The customer pays the bill on 31 March when €15,000 is worth £10,750. The
exchange gain of £750 is taxable as a loan relationship credit.
Example: exchange differences on provisions
Opit Ltd has an accounting period ending on 31 December each year. At 31 December the company
identifies contingent liabilities based on guarantees provided to US customers. It includes in its accounts
a US $ provision against possible future guarantee payments. The provision is translated into sterling
for the accounts.
At each accounting date the provision is revalued in US $. It is then translated onto the balance sheet in
sterling. There is no lending of money, and no money debt. Without CTA09/S483 the company could
not include the exchange gain or loss that arises in the tax computation.
Exchange gains and losses on certain money debts not allowed
CTA09/S486 prohibits exchange gains and losses on certain money debts.
Tax debts
A company with a non-sterling functional currency may show in its accounts (normally in reserves)
exchange gains or losses on corporation tax and other UK taxes that are payable or refundable in
sterling, or on tax provisions. Such exchange differences are not taxable or allowable.
Foreign tax
No exchange gain or loss is allowable if it arises on foreign tax unless the tax is allowed as a deduction
under ICTA88/S811. The exchange gain or loss should be calculated on the amount given as a
deduction. This includes indirect overseas taxes for which a deduction is allowed, such as VAT.
Deductions prohibited by statute
No exchange gain or loss is allowable or chargeable on items appearing in the profit and loss account
that are adjusted (or should be) in the computation under any statutory or other rule of law. This
includes
• entertaining expenditure prohibited by CTA09/S1298
• penalties and fines prohibited by case law.
It does not include amounts prohibited only by CTA09/S53. So exchange gains and losses on capital
expenditure can be loan relationship debits or credits.
Example
A UK pharmaceutical company purchases items of laboratory glassware and other equipment from
Germany, paying in euros. Exchange gains or losses therefore arise on the money debts that subsist
between the time the invoices are recorded and the time when they are paid. In accordance with
company policy, the company does not capitalise items costing individually less than £100. However, in
its tax computations, it adds back an amount representing capital expenditure that has been charged
through the profit and loss account but is disallowable for tax purposes. But exchange gains or losses
associated with this expenditure are taxable or allowable. This put the company in the same position as
if it had capitalised the expenditure