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HMRC internal manual

Company Taxation Manual

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Distributions: general: interest or other value in respect of securities - introduction

CTA10/S1000 (1) E and F - ‘non commercial’ and ‘special’ securities

There is legislation that re-characterises as a distribution certain interest or other value passing from a company in respect of securities which in reality amounts to the withdrawal of profits from a company. Such distributions may be made, for example, by paying interest at an excessive rate or at a rate dependent on the results of the company’s business.

CTA10/S1000 (1) E treats as a distribution:

  • any interest or other distribution out of assets of the company in respect of securities where the consideration given by the company in respect of the principal secured represents more than a reasonable commercial return for the use of that principal.

CTA10/S1000 (1) E does not treat as a distribution any part of the consideration that either:

  • represents the return of the principal itself, or
  • represents a reasonable commercial return for the use of that principal.

In other words, only the excessive element of the interest or other distribution is caught by CTA10/S1000 (1) E, under the ‘non commercial’ rule.

The remainder of the interest or other distribution may, however, be caught for example by CTA10/S1000 (1) F under condition C of the ‘special security’ rules, interest dependent on the results of the business. Prior to Tax Law Rewrite this provision was in ICTA88/S209 (2)(e)(iii).

A further transfer pricing rule applies to interest which would not be paid on an arm’s length basis. For accounting periods beginning before 31 March 2004 this was a ‘thin capitalisation’ rule at ICTA88/S209 (2) (da), which was repealed by FA04 and replaced by a general arm’s length rule, now in TIOPA10/PART4. Before S209(2)(da) was introduced by FA95 the rule had been at S209(2)(e)(iv). For more guidance see INTM413250. INTM655070 deals with the interaction between the TIOPA arm’s length rule and CTA10/S1000 (1) E, uncommercial securities.

CTA10/S1000 (1) F treats as a distribution (subject to the following paragraphs) any interest or other distribution out of assets of the company in respect of certain securities. These securities are identified at CTM15510 and CTM15515.

CTA10/S1000 (1) F does not catch:

  • any part of the distribution that represents a repayment of the principal secured by the security, or
  • any part of the distribution that is caught by CTA10/S1000(1) E

The circumstances in which CTA10/S1032 may operate to disapply the distribution treatment are described at CTM15530.

CTA10/S1000 (1) E and CTA10/S1000 (1) F can apply to both short and annual interest.

The words ‘other distribution’ reflect the possibility that the company might pass value in respect of a security in ways other than interest. An example of an ‘other distribution’ could be the payment of a premium on the repayment of a security (but see below) or the transfer of an asset to the investor.

It will be necessary to establish the amount that represents a reasonable commercial return (see CTM15502); and that return will be dependent on the amount of the principal secured (see CTM15501).

In respect of a security

CTA10/S1114 is concerned with when something is done in respect of a security. The legislation applies in the same way as CTA10/S1113 applies to shares - see CTM15130.

Groups of companies

Where groups of companies are involved see CTM80050 onwards.