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HMRC internal manual

Community investment tax relief manual

From
HM Revenue & Customs
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Withdrawal of relief: Repayment of loan capital

CTA2010/Part 7/Chapter 5/S245; ITA/s362

CTA2010/s226 & ITA/s345 set out conditions that a loan must satisfy if it is to be eligible for relief under the CITR scheme. These include limits on the extent to which a loan may be repaid during the five year period beginning on the day the loan was made (the “five year period”). If these limits are exceeded by other than an amount of insignificant value (see below) then any relief obtained in respect of the loan is withdrawn.

Specifically, relief is withdrawn if

  • during the final three years of the five year period
  • the average capital balance of the loan is less than the permitted balance for the year (unless the difference is an insignificant amount).
Relevant year of five year period Permitted Balance
Year 3 75% of the average capital balance for the period of six months beginning eighteen months after the investment date
Year 4 50% of the average capital balance for the period of six months beginning eighteen months after the investment date
Year 5 25% of the average capital balance for the period of six months beginning eighteen months after the investment date

The average capital balance for any period is the mean of daily balances of capital outstanding during the period. But in computing that average certain non-standard repayments are ignored.

Those non-standard repayments are repayments that are made -

  • at the discretion of the community development finance institution (CDFI) and which do not arise, directly or indirectly, out of the terms of the loan, or
  • as a result of a failure of the CDFI to fulfil an obligation under the loan agreement that;

    • is imposed only because of the commercial risk to which the investor is exposed under the loan agreement, and
    • is no more likely to be breached than any obligation that might have been expected to be imposed in the absence of the CITR scheme.

Amounts of insignificant value

An amount of insignificant value is an amount of less than £1,000 or (even if it is more than £1,000) an amount that is insignificant in the context of the average capital balance for the year in question.

The average capital balances are not regarded as having been exceeded if the excess is an amount of insignificant value.

Example

A company enters into a loan agreement with a CDFI on terms such that

  • it may borrow up to £100,000, with the maximum amount of the loan being drawn down within the first 12 months,
  • with no capital repayments during the first two years
  • and the loan to be repaid at the rate of 20 per cent of the maximum balance per year starting in the third year, with repayment made at the beginning of each year.

The CDFI borrows £40,000 on 1 January 2003, increases the loan to £80,000 on 1 July 2003, repays £16,000 on 1 January 2005, £16,000 on 1 January 2006, and chooses to repay the remainder of the loan in full on 1 January 2007.

The average capital balance and invested amounts for each year of the five year period are as follows

Year to Average capital balance and Invested amount Tax relief
31/12/03 £60,000  
(CTA2010 S222 (2)(a) & ITA/s337(2)(a)) £3,000  
  31/12/04 £80,000
(CTA2010 S222 (2)(b) & ITA/s337(2)(b)) £4,000  
  31/12/05 £64,000
(CTA2010 S222 (2)(c) & ITA/s337(2)(c)) £3,200  
  31/12/06 £48,000
(CTA2010 S222 (2)(c) & ITA/s337(2)(c)) £2,400  
  31/12/07 Nil
(CTA2010 S222 (2)(c) & ITA/s337(2)(c)) Nil

There is no withdrawal of earlier years’ relief because the final repayment on 1 January 2007 was made early at the CDFI’s discretion and not required under the terms of the loan agreement.