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HMRC internal manual

Community investment tax relief manual

Alternative finance arrangements (AFAs): Modifying the CITR rules to accommodate AFAs

FA05/s54A

Arrangement treated as “loan”

Where a financial arrangement between a community development finance institution (CDFI) and one of its investors, or between a CDFI and enterprise in which it invests falls within:

  • FA05/s47: alternative finance return
  • FA05/s49: profit share return
  • FA05/s49A: profit share agency

the arrangement is treated as a “loan” for the purposes of the CITR scheme (CITM4320) and any alternative finance return or profit share return is treated as equivalent to interest.

Whether or not “qualifying investments” or “relevant investments”

If an arrangement does qualify for such treatment as a “loan” for CITR purposes it does not necessarily mean that the investment will satisfy the conditions required for it also to be a qualifying investment in the CDFI (CITM4010), or relevant investment by the CDFI (CITM3030).

In order to determine:

  • if such an arrangement can be treated as a qualifying investment or a relevant investment, and, if it can,
  • the timing, amount and outstanding balance of the investment for the purposes of the scheme

it is necessary to read the CITR rules with certain modifications.

These modifications equate the arrangements involved in a conventional loan (e.g. amount and timing of the loan, payment of interest, capital outstanding) as set out in the CITR rules, with the mechanics of the arrangements covered by FA05/s47, s49 & 49A.

For example, in order to be a qualifying investment in a CDFI the length of time funds are committed to the CDFI under an AFA, and the extent to which they may be repaid within the five-year period, must be equivalent to the conditions that must be met by conventional loans (CITM4020).

Similarly, if a CDFI enters into an AFA with a profit-distributing qualifying enterprise the rate of alternative finance return or profit share return must at or above the equivalent of a market rate of interest if it is to be a relevant investment (CITM3060).

Detail on specific arrangements

For more detail on how the CITR rules are to be read when dealing with arrangements under FA05/s47, s49 & 49A, see:

CITM4340 FA05/s47: alternative finance return
   
CITM4350 FA05/s49: profit share return
CITM4360 FA05/s49A: profit share agency