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HMRC internal manual

Company Taxation Manual

Groups & consortia: groups - entitlement to profits or assets available for distribution: business results dependency test

CTA10/S163 permits a loan to be treated as a normal commercial loan even though the interest depends on the results of the business, provided:

  • the arrangement is for the interest rate to reduce as the results of the business improve or the value of its assets increases; (this situation would merely reflect the lender’s improved security, and justify a lower interest rate), or
  • the arrangement is for the interest rate to increase as the results of the business deteriorate or the value of its assets diminishes; (this situation would merely reflect the lender’s poorer security, and justify a higher interest rate). Where such an interest rate is based on a ratio of debt : adjusted earnings of the borrower, follow the approach in CTM15525.

    CTA10/S163(3) to (6) provides an exception from the general rule that limited recourse loans are not normal commercial loans for loans to buy land.

    The general rule is that a loan is not a normal commercial loan where the lender has only limited recourse to the assets of the borrower because the lender can enforce payment only by exercising rights over the linked security. In this situation the lender’s interest entitlement is likely to depend to some extent on the value of the borrower’s assets.

    The exception provided by CTA10/S163(4) applies where:


  • the loan is for the purpose of facilitating the acquisition of land other than with a view to resale at a profit, and
  • the whole of the loan is applied to the acquisition of the land, or in meeting the incidental costs of obtaining the loan, and
  • the payment of any amount due in connection with the loan is secured on the land acquired and there is no other security for it. Incidental costs of obtaining the loan comprise:


  • expenditure on fees,
  • commissions,
  • advertising, and
  • printing, or other incidental cost wholly and exclusively incurred for the purpose of obtaining the loan, or providing security for it.

    The definition of a loan on which the amount of interest depends to an extent on the results of the company’s business covers a limited recourse loan.