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HMRC internal manual

Corporate Finance Manual

Introduction to the Corporate Finance Manual: what is the Corporate Finance Manual?

What is the Corporate Finance Manual?

The Corporate Finance Manual (CFM) contains HM Revenue and Customs guidance on the corporation tax treatment of corporate finance. This refers primarily to the tax rules on loan relationships and derivative contracts in Parts 5 to 7 of the Corporation Tax Act 2009. The CFM also includes guidance on other tax rules that appear outside the main body of the legislation which are relevant to the taxation of corporate finance.

What do we mean by ‘corporate finance’?

Corporate finance covers the raising of funds and the managing of money by companies. A company needs money to fund the start up and expansion of business, and to meet its day to day expenses. Some of its finance will come from issuing shares, but nearly every company will also need to borrow money at some stage.

The director of a small company may have to decide whether to borrow from the bank or from a relative. The finance director of a large multi-national company may have to weigh up the costs of issuing bonds in the international money markets in a currency other than sterling or entering into a securitisation to raise further funds.

Almost all companies both borrow and lend. A company may invest surplus funds in a deposit account, or it may invest in another business. Some companies lend their surpluses to each other in the form of ‘commercial paper’. Some invest in ‘eurobonds’.

The return on such borrowings, or deposits and investments, may come in a variety of forms, such as interest, discount, an increase in the value of assets, or some other type of return.

Many companies make sales or purchases in a foreign currency, or borrow or lend in a foreign currency, or invest in assets, such as shares in an overseas subsidiary, which are denominated in a foreign currency. As a result of such transactions, a company will have gains or losses on foreign exchange in its accounts.

In all of these activities there are risks and opportunities. Interest rates may rise or fall, exchange rate may fluctuate, counterparties to a debt may default. A company may use derivative products such as futures, swaps and options to ‘hedge’ such risks and manage cash flow. Such products may also be used for investment, trading, and speculation.

At whatever level, these activities constitute corporate finance, and the Corporate Finance Manual provides guidance on the corporation tax treatment of such matters.