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HMRC internal manual

Business Income Manual

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Specific deductions: interest: alternative finance arrangements - overview

This chapter applies for Income Tax purposes to the computation of trade profits and property income. References in the text to a ‘business’ should therefore be taken to include both trades and property businesses. The chapter does not apply for Corporation Tax purposes, where there are separate rules in the loan relationships legislation (see CFM11000).

S564A-S564Y Income Tax Act 2007 (ITA 2007)

An alternative finance return arrangement can be used as an alternative to a conventional loan or to provide a return on a money deposit.

Part 10A ITA 2007 describes various types of alternative finance arrangement. The types that are used to provide funding for a trade or the purchase of its assets are purchase and resale arrangements and diminishing shared ownership arrangements. The effective cost of those types of funding (excluding arrangement fees or set-up costs) is described as an alternative finance return.

Where an alternative finance arrangement is entered into for the purposes of a business, the alternative finance returns paid under that arrangement are treated as an expense of that business in the same way as interest. In particular the ‘wholly and exclusively’ test must be satisfied (see BIM45665).

A full description of alternative finance arrangements and the calculation of the alternative finance return is given in CFM44010 onwards.