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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Investment trusts: interest distributions: qualifying interest income - general


Where a company receives interest income from interest bearing assets and opts to use the tax framework to designate all or part of its dividend as an interest distribution, it can only do so up to the amount of qualifying interest income received in a particular accounting period (AP).

The company will need to identify its qualifying interest income to determine how much can be made as an interest distribution. Qualifying interest income (QII) is defined in terms of credits (or debits) brought into account in respect of loan relationships and derivative contracts, as detailed below. This in turn will depend on the credits or debits shown in the company’s accounts, in accordance with the company’s normal accounting policies.

QII does no more than provide an upper limit to the amount of a dividend that the company can designate as an interest distribution. Within that limit, the company is free to designate as much or as little of a dividend as it chooses.

Determining the qualifying interest income (QII) for an AP - loan relationships

Under regulation 8 SI 2009/2034 the company’s QII is the net income that is the aggregate of the credits and debits that would be brought into account in respect of an AP

  • under the loan relationship rules in Part 5 of the Corporation Tax Act 2009 (CTA 2009) and
  • in respect of certain derivative contracts covered in Part 7 of CTA 2009. There is more about derivative contracts generally in the Corporate Finance Manual at CFM50000 onwards.

‘Loan relationships’ here includes instruments and arrangements that are treated as loan relationships for tax purposes, including certain holdings in unit trusts, open-ended investment companies and offshore funds, repos, and ‘alternative finance’ arrangements. These are covered by Part 6 of CTA 2009, which ensures that credits or debits are brought into account under the Part 5 rules, and therefore included in regulation 8(2)(a) SI2009/2034.

This definition excludes capital profits, gains or losses deriving to an investment trust under paragraph section CTA09/S395. For investment trusts (ITs) preparing accounts in accordance with UK Generally Accepted Accounting Practice, profits, gains or losses of creditor relationships which are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice (SORP) for ITs, issued by the Association of Investment Companies (AIC), are excluded in computing loan relationship debits and credits. See the Corporate Finance Manual atCFM37020 (‘Investment trusts and venture capital trusts: creditor relationships’) for further details.

Subject to this important qualification, all of the normal computational rules for loan relationships apply (see CFM30000 onwards). In general, amounts brought into account as income under the SORP under an effective interest rate method - including amortisation of discount on discounted securities, and adjustments for charges and expenses - will be reflected in QII. Capital profits or losses, such as impairment losses, will not.

For the purposes of calculating the QII for a particular AP any interest distributions made are not to be included as a loan relationship debit (regulation 8(3) SI2009/2034).

If the total of the company’s relevant debits brought into account are more than the total of the relevant credits in respect of an AP then the QII will be nil for that AP (regulation 8(4) SI2009/2034).

No loan relationships deficits brought forward from previous APs can be taken into account when calculating the QII for a particular AP (regulation 8(1) SI2009/2034).